Raghvendra Nath is the Managing Director of Ladderup Wealth Management
“It is very likely that inflation remains sticky in the developed world for many more quarters,” Raghvendra Nath of Ladderup Wealth Management told Moneycontrol in an interview.
The source of inflation is not just rising oil prices. The root cause is the unbridled liquidity that has been pumped into the US and European Economies in the last two years and before that as well, the Managing Director of Ladderup Wealth Management feels.
Nath, who has over 27 years of corporate experience and a deep knowledge of the financial markets, believes private banks would be a wrong choice if one wants to play the capex cycle. Edited excerpts:
Do you think that most of negative news has fully priced into the equity markets now?
You can never say if the markets are fully pricing the news, negative or positive. Markets are a barometer of investor sentiment that keeps fluctuating with the news flow as it happens. If markets were to precisely price news, we would never have the wild swings that we usually witness.
To some extent global markets have been reacting to negative data related to high inflation, rising interest rates, the Ukraine war as well as the fear of recession. But even on these parameters, the last word is yet to be spoken. India on the other hand, reacted to some of the global negative news in the last few months but then the staged a strong rally and are now close to the previous peaks.
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Do you see the possibility of markets delivering at least 15 percent return by next Diwali, especially after subdued returns since the previous festival?
Anything is possible in equity markets. So, yes, a 15 percent return is also possible over the next 12 months. A lot shall depend on how the corporate profitability grows in the coming quarters. As of now it looks like the earlier bullishness around corporate profitability has waned somewhat in the wake of higher inflation in India, higher interest rates, plateauing of post-COVID demand, and also high current account deficit due to accelerated INR depreciation.
Indian markets are already at a relative premium to other emerging markets so if the global risks around inflation and recession persist over the next year, it may be difficult to witness any sizeable rally in prices in the next 12 months. On the other hand, if there is a solution to the Russian-Ukraine conflict, if the money market tightening stops and if the actual recession is short term, there is a possibility that global markets, as well as India, deliver healthy returns.
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Do you expect the US dollar to strengthen further during the rest of the financial year? If yes, how bad it could be for the Asian markets?
The USD has upset the applecart of most countries in the last 2 to 3 quarters with unabated appreciation. The Dollar index has moved up by almost 18 percent in the last year. There is a possibility that the USD may appreciate a little further in the coming months as the Fed continues to increase interest rates and the monetary tightening continues.
An appreciating dollar is upsetting the trade balance and current account balance for most countries. But if you look at history, there were prolonged periods where the USD weakened. I feel that we are soon entering a period like that and I feel that if we look at a 1-2 year horizon, there is a very strong possibility that the USD may retrace quite a bit. The reasons are manifolds.
A prolonged recession in the United States may end the monetary tightening sooner than we expect. A lot of countries are now looking at bilateral trades in their home currencies. It started with Russian oil but my guess is that it can move to many other commodities, goods and services. If a trend like that gains ground the dependence on US Dollar may reduce.
In India, the capital flows have been a big balancing factor for our trade deficit. With India being the only large economy in the world that can confidently grow at 5 percent or more, the FDI and FPI flows shall continue to grow strongly. Like for the last few years, INR shall continue to show relative strength vis-à-vis other currencies in such a scenario.
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Do you think the private banking stocks are best placed for playing capex cycle?
Private banks are the wrong choice if one wants to play the Capex Cycle. Most private banks are focusing on retail credit and short term corporate credit. I have not seen any enthusiasm amongst the private banks in funding green and brownfield projects of significant size.
So, if one wants to play the Capex cycle a better bet would be to directly invest in engineering and capital goods companies or in large PSU banks that have traditionally funded large projects in the past.
As the rupee continues sliding, what are the sectors that you think one could bet on now and why?
First of all the INR slide is much lesser than the other large currencies. The Euro, British Pound, Japanese Yen, etc. have fallen much more sharply against the USD in the last few years than the INR.
From a stock market perspective, a weak INR helps export oriented sectors. But as I said earlier, whatever happened in the last 12 months may not be repeated in the next 12 to 18 months. In fact, as cited earlier, there is a good possibility that INR stabilizes around these levels or strengthens in the medium term.
Do you think IT space has already priced in most of the bad news ? If yes, is it the right time to start adding positions in these stocks?
The IT sector is heavily dependent on the demand from the US and Europe, both of which are running a huge risk of entering a recession. If the recession turns out to be a prolonged one, the IT sector may have tepid growth. So I would say, the best is to watch how the global macros unfold in the next few quarters before taking the plunge.
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Will the inflation (globally, and domestic) continue to make headlines for rest of the financial year?
It is very likely that inflation remains sticky in the developed world for many more quarters. The source of inflation is not just rising oil prices. The root cause is the unbridled liquidity that has been pumped into the US and European Economies in the last two years and before that as well.
Especially during the COVID period, most of the liquidity remained onshore and that is what has caused the demand-led inflation. Data points out that the ratio of the number of vacancies to the number of employed is almost 3 times in the US. In such a scenario, wage inflation is also going to remain high. So inflation is becoming a systemic and not a seasonal issue in the US and Europe and that means that this problem may persist for longer than we think.
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