Hemant Kanawala of Kotak Mahindra Life
“If inflation is more supply driven than demand driven, it is feared that world will enter a stagflationary scenario, where growth will be low and inflation will be high,” Hemant Kanawala, Senior EVP & Head-Equity at Kotak Mahindra Life Insurance Company, told Moneycontrol in an interview.
Citing inflation worries, the Reserve Bank of India, following the path taken by global central banks, has so far hiked the repo rate by 90 bps to 4.9 percent. The central bank has also raised its full-year inflation forecast to 6.7 percent, up from 5.7 percent earlier.
On the primary market, which requires buoyancy in the secondary market, Kanawala said the experience of investors in the last 12 months has not been good. Hence he expects activity in the primary market to remain muted in the near term. About 66 companies are ready to launch IPOs, but there have been only 16 IPOs so far in 2022.
Recently, a global financial firm’s CEO hinted about the impact of Fed action and the Ukraine war-induced economic hurricane. What are your thoughts….
The US economy was already feeling the heat of higher prices before the event and the Fed was contemplating normalising monetary policy gradually. The Ukraine war has impacted the supply chain for food and energy, resulting in higher inflation across the world.
As a result, the Fed had to accelerate rate hikes and has also started quantitative tightening. Their aim is to reduce demand and bring down inflation. However, if inflation is more supply driven than demand driven, it is feared that the world will enter a stagflationary scenario, where growth will be low and inflation will be high.
Do you think the market has already priced in most of the negatives or the worst is yet to come?
Longer-term bond yields in India and globally have moved up significantly over the last six months and are above pre-pandemic levels. Equity valuations have also corrected in line with that and are closer to long-term averages. However, a key variable in bond markets is whether inflation will sustain at higher levels and how central banks balance growth and inflation.
For equities, earnings have been resilient till now but whether there will be downgrades going forward due to demand and cost challenges needs to be seen.
Do you see any chance of oil hitting $ 150 or $ 175 a barrel in the coming months? Is it a worrisome factor for India’s growth story?
It is difficult to estimate what levels any commodity can reach in the short term but it is difficult to sustain levels above $ 150 a barrel as demand destruction will be significant. Already many governments are taking measures to insulate their economies from higher oil prices.
But at some point of time, they will have limited resources and will have to pass on the full impact. As India’s dependence on imported oil is high, it will impact India’s macro economy in terms of a higher current account deficit and inflation and hence it is a point of worry.
Do you expect a slowdown in the primary market given the volatility in the secondary market? In all, 66 companies have received approval from Sebi for IPOs…
The primary market requires buoyancy in the secondary market. Also, the experience of investors in the primary market in the last 12 months has not been good. Hence we expect activity in the primary market to remain muted in the near term.
Do you think the full impact of elevated input costs is yet to be seen in corporate earnings?
Some commodities, mainly metals, are already seeing a correction in prices. Hence their impact is already being seen in user industries such as automobiles and capital goods. What is not getting reflected yet is higher energy prices, i.e. oil and coal. This is more widespread and the effect will be felt over the next two quarters.
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