The markets are yet to find their trough, and real interest rates in the US (down 700bps from pre-pandemic levels) are likely to outgrow the hike in India (down only 300bps from pre-pandemic levels). This is likely to accelerate capital outflows and form a vicious cycle impacting the currency, inflation, real yields and causing further capital drain, believes IIFL Securities Chairman R Venkataraman.
At an interview with Moneycontrol, he says that that markets are some way off from the bottom and there could be another 15 percent correction from here. “We suggest Cipla, SBI Life, HUL, ITC, Ashok Leyland, Persistent Systems, Deepak Nitrite, ICICI Bank as our top picks after a severe correction,” Venkataraman shares.
Excerpts from the interview:
What is the message you get from the central banks that continued rate hikes and hinted more hikes to control inflation?
Central banks worldwide were clearly taken by surprise at the violent inflationary impulse triggered by Russia-Ukraine, and all talk of transience of inflation has now been buried, and indeed, replaced by desperate tightening. The main protagonist is the US Fed, and others like Swiss Central Bank, RBI etc. are towing the US Fed line.
Monetary policy looks likely to tighten more rapidly than the market can take, and this will be amplified by liquidity contraction through reserve ratio increases / central bank balance sheet run offs. The exceptions are China and Japan, who are fighting their own battles.
All this suggests that markets have further downside – unless central bank vengeance is halted due to inflation tumbling, and that looks unlikely – demand for crude may soften from monetary policy action, but how will demand for food go down??
Do you think inflation and recession fears will dominate the next few quarters?
Yes, that seems to be the case since this is a shortage driven inflation, and the only factor where shortages are likely to ease is in China manufacturing, as they open up post Omicron, and that can help resolve supply bottlenecks, and even cause a finished goods glut. So for a brief period we may see retail inflation plummet.
Wholesale inflation is a different beast, however. The shortages in crude and food are likely to persist and inflationary impulses are likely to spread to other items.
Do you think we are on the verge of a major earnings downgrade cycle?
We will see some demand compression for sure, and in discretionary spending. This allied with high costs will keep margins under pressure for all commodity consuming companies. Commodity producers especially upstream oil & gas and refining may see exceptional profits.
Are we near the bottom as the market already corrected 17-odd percent from record highs amid heavy selling by FIIs, or is India still an expensive market?
All markets have a downside till central banks calm down – at present they seem to be quite uncertain on how rapidly to tighten, and are probably overdoing it a bit. Liquidity contraction by US Fed through balance sheet run off has started at the rate of $ 30 billion per month, and will double in September to $ 60 billino per month, and will keep a lid on any potential equities exuberance. The impact will be felt worldwide, including in India.
Is there any possibility of FIIs turning positive in terms of flow in the second half of this year, given heavy selloff in the market, especially after more than Rs 3.8 trillion of outflows since October 2021?
There is no such possibility as markets have not yet found their trough, and real interest rates in US (down 700bps from pre-pandemic levels) are likely to rise by more than in India (down only 300bps from pre-pandemic levels) which will cause capital outflows to accelerate and this can be a vicious cycle impacting currency, inflation, real yields and causing further capital outflows. Markets are some way off from the bottom. Having said that, another 15 percent from here and we should largely be done.
After a severe sell-off in the market, have you spotted any ideas or themes that look really more attractive now?
Trucks, rural, IT, FMCG, select auto, chemicals, select Pharma look attractive. Cement, housing, building materials, consumer discretionary, oil marketing companies don’t appeal to us.
We suggest Cipla, SBI Life, HUL, ITC, Ashok Leyland, Persistent, Deepak Nitrite, ICICI Bank as top picks.
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