Divam Sharma is the Founder of Green Portfolio
The Federal Reserve has sharpened its focus on taming the inflation and since the inflation prints have gotten out of control in the US, the American central bank is ostensibly hawkish.
All eyes are now on the interest rate decision and commentary by the Federal Reserve tonight, says Divam Sharma, Founder of Green Portfolio.
After too much volatility this year and significant correction from record high levels, he believes the markets are bottoming out but he’s bullish about the a steady recovery from these levels.
In an interaction with Moneycontrol, Sharma shares that these discounted valuations will not last long, and FPIs and FIIs will re-enter the Indian equity space to exploit the discount. “The year 2022 will be a reset year for the markets,” he says. Excerpts from the interview:
Do you see any sign of inflation peaking out in coming months?
We see inflation peaking in the next three months. We are already seeing prices of some food and commodities cooling off.
We should see resumption and recovery in manufacturing and exports from China. The most recent surge in cases in China will cause a small blip in the recovery, but we see supply chain bottlenecks and inflation peaking in the next three months.
The reopening of China will be a major contributor to inflation easing as 12 percent of our imports are from China, and is our 2nd largest trade partner.
Inflation targeting as a priority is visible on RBI’s action and commentary. We have witnessed higher inflation levels in 2012-2014. We are certain that this will not derail India from its long-term GDP growth trajectory over the coming years.
Given the consistent volatility and bears having control at Dalal Street, what is your great advice to investors?
Investors have to understand the fact that all portfolios will be prone to market cycles. This is inevitable. I’m of the strong opinion, markets are now bottoming out. We expect a steady recovery from these levels. These discounted valuations will not last long, and FPIs and FIIs will renter to exploit the discount.
If the premise at which you bought stock has changed and become unfavourable, or the stock is fundamentally weak, or if it’s a stock that you entered because of FOMO (fear of missing out), we suggest exiting, and reallocation capital to fundamentally strong small or mid-cap stock, which may require exiting at a loss.
Do you expect the hawkish stance from the Federal Reserve as inflation came in at 40 years high of 8.6 percent in May? Is there any possibility of more than 50 bps hike in Fed funds rate this week?
A 50 basis point hike is priced into the markets, but a 75 basis point hike is inconceivable at this meeting.
Fed has sharpened its focus on taming inflation above all else and since the inflation prints has gotten out of control in the US, we expect the Fed comments to be hawkish.
Do you think there is a higher possibility of recession in the United States especially after considering inflation for May and recent consumer sentiment data? What is the message you are getting from US bond yields?
Most if not all Fed rate hikes have been priced in aggressively by the markets.
The PMI prints, building permits, and weekly unemployment claims coming out of the US are indicating early signs of slowdown, and we are wary about this.
However, markets are forward-looking, and according to our research, nearly 80 percent probability of recession is baked into the markets.
The inflation we see peaking in the next 3 months.
Is there any possibility of the market closing the year 2022 with positive bias considering the current macro environment, as so far, we are down around 6-7 percent?
The year 2022 will be a reset year for the markets. We see a recovery in the markets starting Q4CY22. When we talk to the management, we do not see any signs of stress in the outlook. The valuations, in many cases, look highly attractive. GDP growth outlook for the next 3-5 years is over 7 percent. If you look at other indicators like hiring, power consumption, GST, etc, all are indicating a positive trend.
The sector that is completely under the control of bears this year is IT? Do you think it is the time to add an entire space to a portfolio or one should wait for some more time?
Debt-laden and cash-burning tech companies are being punished in the US since the rate hikes will impact their results and liquidity. This effect is being reverberated across the Indian IT space.
However, incumbents in our IT sector have rock bottom borrowings, consistent high margins, good visibility of orders, the runway for expansion and organic growth, and are well-established entities with a strong pedigree.
This is the time to begin onboarding the IT sector into investors’ portfolios. Valuation of the IT sector which has been expanding at a 15-20 percent CAGR is trading at 20-25 P/E (price-to-earnings) which is a comfortable valuation area for us.
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