ETMarkets.com“After a year of tremendous returns in FY21 and decent returns in FY22 -- FY23 could end up being the year of price and time consolidation for stock markets,” says Gopal Kavalireddi, Head of Research at FYERS.
In an interview with ETMarkets, Kavalireddi said: “The market is currently weak owing to interest cycle reversal, FII outflows, high and persistent inflation, Ukraine-Russia war impacting supply chains, and projections of weak global growth and recession fears.,” Edited excerpts:
With central banks looking at tightening the money supply – what is your view on markets in the medium to long term?
The liquidity buoyancy witnessed in global markets, during CY20 and a better part of CY21, is on a taper mode, with most central banks initiating the rate hike cycle.
With a meteoric rise seen in most asset and commodity prices, inflation turned sticky in the previous year, continues to persist in the present and could hold ground for at least two more quarters in the future.
The latest quarterly results highlighted the margin pressures, uncertain demand, supply chain disruptions, and their impact on earnings and economic growth.
In addition to the above factors, geopolitical tensions, and currency volatility continues to keep the medium-term outlook uncertain.
But the real pain was felt in the broader market with Nifty Midcap 100 index down 17.5 per cent and the Nifty Smallcap index fell 26 per cent from their recent highs.
Inflation to remain high throughout the first three quarters of 2022-23 and might subside only by the end of the current financial year.
Rising interest rates, higher inflation, and lower consumption could result in a flat earnings growth. After a year of tremendous returns in FY21 and decent returns in FY22 -- FY23 could end up being the year of price and time consolidation for stock markets.
If someone plan to put Rs 10 lakh now – which is the ideal medium. What is the ideal asset allocation strategy?
Irrespective of the environment, it is imperative that investors focus on the time-tested principles of asset allocation, based on risk profile, financial capabilities and investment goals.
The first and the foremost guideline to be followed by any investor is to understand his/her risk profile and determine if he/she is a conservative investor, moderate investor, or aggressive investor. Based on this, an appropriate asset allocation can be arrived at, depending on the investment horizon.
History of the last 10 years' data showed that there is no single asset class that can provide sustainable returns. At times, it is equities, at times debt/fixed income, and at other times, gold or real estate.
An ideal strategy may be difficult to formulate, but a model asset allocation strategy could be constructed based on the type of investor.
Hence, a better understanding of the investment opportunities, coupled with an appropriate risk management system, can help an investor in countering volatile market conditions. Each investor is unique, and asset allocation should be customized based on their needs.
Do you think FDs will now become more popular at least for the risk-averse investor in light of rising interest rate scenario?
Fixed deposits, traditionally, have been one of the most preferred investment avenues for a large part of the Indian populace, for over many decades.
As per a 2019 SEBI survey, 95% of Indian families preferred bank FDs. This has been mainly due to the high-interest rates prevailing earlier.
However, over the last couple of years, due to falling interest rates, and high inflation, the effective rates of return were negative.
With disposal incomes being low and the cost of living rising, investors sought higher-risk avenues like equities and cryptocurrencies.
With a view to rein in inflation, RBI has started reversing the interest rate cycle.
One of the unintended consequences of a tightening monetary policy is that fixed income instruments turn attractive. RBI has already increased 90 bps in repo rate in less than 2 months, and few private banks have started hiking the deposit rates across various tenures.
With the stock market in a consolidation mode and a possibility of the real rate of return turning positive, albeit slowly, we could see fixed deposits being opted by a certain section of investors.
All said and done, in the long run, equities are the best avenues to deliver substantial returns and create sustainable wealth for investors.
We saw the rupee hitting a record low in June – which stocks or sectors are likely to benefit the most from the surge?
The Indian Rupee depreciated from 68.8 in July 2019 to a record low of 78.12 to the dollar over a span of 3 years. After August 2020, the highest depreciation came over the last 9 months, moving down from 72.95 to 78.12.
Export-oriented sectors from manufacturing like agro products, textiles, metals, pharmaceuticals, and Information technology from the service sector could be the beneficiaries of the rupee depreciation. However, the quantum of benefit for manufacturing companies could be less, as persistent supply chain issues, higher shipping costs, competitive pricing and sticky inflation continue to play their part, In denting demand and operating margins.
Crude oil is also hovering around $120/bbl – which might not put India in a comfortable scenario if it holds around this level. How will it impact economy, as well as valuations?
Geopolitical tensions are exerting severe pressure on crude oil prices. India is still an energy dependent nation, importing ~83% of its crude oil requirements & accounting for 32% of our imports.
This dependency impacts the quantum of imports, and thereby trade deficit numbers. Estimates say that for every $10/bbl increase in crude prices (beyond the $100/bbl mark), the impact on India’s GDP could be 15-20bps, on retail inflation around 35bps, and wholesale inflation by 125-130bps.
High inflation is already playing its part on limiting Indian economic growth. Real GDP growth for FY22-23 is expected to be at 7.2% and consumer price inflation is projected to be at 6.7%.
Decreased excise duty on petrol and diesel, ban on certain agro exports, and other supply-side measures have been initiated by the govt to reduce the negative impact on growth.
Nifty has corrected close to 13% from its recent highs, while the small-cap indices have corrected by more than double that percentage.
As per analysts’ estimates, Nifty50 is trading at ~ 20.5X its one-year forward EPS. and post Q4FY22 results, earnings estimates have been reduced only by 2 to 2.5%. Nifty EPS for FY24 is expected to be around the Rs.900 mark.
With rise in interest rates do you think it would dent valuations?
A higher interest rate cycle does impact valuations, more so in the case of rate-sensitive sectors, high growth as well as high debt companies.
Technology-related stocks are the first casualty due to expectations of subdued cash flows and lower dividends. Expectations of rate hikes coupled with higher wage cost inflation have resulted in a tech sell-off in the US.
In India too, investors shunned stocks with higher price-to-earnings ratios, and are transitioning into value stocks that are debt-free, strong on the balance sheet, and are able to maintain their operating margins.
The rate hike by RBI last month in May was the first hike since August 2018. Over these 45 months, the Repo rate was cut from 6.5% to 4%, and with an unabated rise in inflation, the monetary policy committee made it a priority to normalize rates.
Valuations are a slave of earnings, and a hike in interest rates is sure to impact the revenues and profitability of companies.
FII selloff in India is part of a larger global selloff. When will FIIs reverse the trend and does that mean that FII heavy stocks where they have a double-digit stake could remain under pressure?
After a stupendous year of returns post the stock market crash in March 2020, murmurs of tapering of liquidity, and interest rate hikes by the Fed and other central banks, resulted in investors cashing in their gains.
In India too, the same scenario unfolded, with FIIs continuously selling in equity markets. Since April 2021, with the exception of September 2021, there has been relentless selling by FIIs in each month, totalling a mammoth Rs.3.88 lakh crore. Year to date, the total selling by FIIs is Rs.2.44 lakh crore.
However, the bright side was that, this selling was lapped up by a DII buying of Rs.1.97 lakh crore Year to date, and Rs.3.15 lakh crore since April 2021.
The participation of retail investors through direct equity, and the constant flow of a substantial amount into mutual funds negated the FII selling to a large extent.
This leads us to assume that domestic investors are here to stay, and any pressure exerted on FII heavy stocks by their selling, can be countered sufficiently.
This global sell-off by FIIs has come on the back of weak economic growth and recession fears, emanating due to rate hike cycle, overvaluation in asset prices – equities, commodities, real estate, and alternate investments.
This outflow could continue for some more time with sticky inflation and tightening of excess liquidity in the near term.
There are plenty of stocks trading at double-digit discounts compared to their 52-week highs. What is the right strategy to be followed when buying a falling knife?
As of 10th Jun 2022, 474 stocks from the Nifty 500 have fallen greater than 10% from their 52-week highs, and 159 stocks are just 9% away from their 52-week lows.
No sector has been spared, with stocks from Finance, Healthcare, Realty, Retail, and IT bearing the brunt of the selling. Of the 500 stocks from this index, negative returns have been delivered by - 262 stocks in a 1-month period, 317 stocks in a 3-month period, 392 stocks in a 6-month period, and 273 stocks over the last year.
The market is currently weak owing to interest cycle reversal, FII outflows, high and persistent inflation, the Ukraine-Russia war impacting supply chains, and projections of weak global growth and recession fears.
At this point, investors who are not savvy or active in tracking global cues or are investing for the short term can show restraint in deploying fresh capital into equities, till the tide turns for the better.
Long-term investors with at least a 2-3-year view can initiate small buys, periodically, and accumulate good quality stocks, with a healthy balance sheet, good product portfolio, and strong management.
Investing in quality at this time is of utmost priority, not just to safeguard capital in the short term, but to emerge successful when the headwinds dissipate, and economies get back on the growth track.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)
In an interview with ETMarkets, Kavalireddi said: “The market is currently weak owing to interest cycle reversal, FII outflows, high and persistent inflation, Ukraine-Russia war impacting supply chains, and projections of weak global growth and recession fears.,” Edited excerpts:
With central banks looking at tightening the money supply – what is your view on markets in the medium to long term?
The liquidity buoyancy witnessed in global markets, during CY20 and a better part of CY21, is on a taper mode, with most central banks initiating the rate hike cycle.
With a meteoric rise seen in most asset and commodity prices, inflation turned sticky in the previous year, continues to persist in the present and could hold ground for at least two more quarters in the future.
The latest quarterly results highlighted the margin pressures, uncertain demand, supply chain disruptions, and their impact on earnings and economic growth.
In addition to the above factors, geopolitical tensions, and currency volatility continues to keep the medium-term outlook uncertain.
After hitting an all-time high of 18,604.45 in October 2021, Nifty50 has witnessed a price correction of about 13 per cent, which is actually not much.
But the real pain was felt in the broader market with Nifty Midcap 100 index down 17.5 per cent and the Nifty Smallcap index fell 26 per cent from their recent highs.
Inflation to remain high throughout the first three quarters of 2022-23 and might subside only by the end of the current financial year.
Rising interest rates, higher inflation, and lower consumption could result in a flat earnings growth. After a year of tremendous returns in FY21 and decent returns in FY22 -- FY23 could end up being the year of price and time consolidation for stock markets.
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Irrespective of the environment, it is imperative that investors focus on the time-tested principles of asset allocation, based on risk profile, financial capabilities and investment goals.
The first and the foremost guideline to be followed by any investor is to understand his/her risk profile and determine if he/she is a conservative investor, moderate investor, or aggressive investor. Based on this, an appropriate asset allocation can be arrived at, depending on the investment horizon.
History of the last 10 years' data showed that there is no single asset class that can provide sustainable returns. At times, it is equities, at times debt/fixed income, and at other times, gold or real estate.
An ideal strategy may be difficult to formulate, but a model asset allocation strategy could be constructed based on the type of investor.
You Might Also Like:
Do you think FDs will now become more popular at least for the risk-averse investor in light of rising interest rate scenario?
Fixed deposits, traditionally, have been one of the most preferred investment avenues for a large part of the Indian populace, for over many decades.
As per a 2019 SEBI survey, 95% of Indian families preferred bank FDs. This has been mainly due to the high-interest rates prevailing earlier.
However, over the last couple of years, due to falling interest rates, and high inflation, the effective rates of return were negative.
With disposal incomes being low and the cost of living rising, investors sought higher-risk avenues like equities and cryptocurrencies.
With a view to rein in inflation, RBI has started reversing the interest rate cycle.
One of the unintended consequences of a tightening monetary policy is that fixed income instruments turn attractive. RBI has already increased 90 bps in repo rate in less than 2 months, and few private banks have started hiking the deposit rates across various tenures.
With the stock market in a consolidation mode and a possibility of the real rate of return turning positive, albeit slowly, we could see fixed deposits being opted by a certain section of investors.
All said and done, in the long run, equities are the best avenues to deliver substantial returns and create sustainable wealth for investors.
We saw the rupee hitting a record low in June – which stocks or sectors are likely to benefit the most from the surge?
The Indian Rupee depreciated from 68.8 in July 2019 to a record low of 78.12 to the dollar over a span of 3 years. After August 2020, the highest depreciation came over the last 9 months, moving down from 72.95 to 78.12.
Export-oriented sectors from manufacturing like agro products, textiles, metals, pharmaceuticals, and Information technology from the service sector could be the beneficiaries of the rupee depreciation. However, the quantum of benefit for manufacturing companies could be less, as persistent supply chain issues, higher shipping costs, competitive pricing and sticky inflation continue to play their part, In denting demand and operating margins.
Crude oil is also hovering around $120/bbl – which might not put India in a comfortable scenario if it holds around this level. How will it impact economy, as well as valuations?
Geopolitical tensions are exerting severe pressure on crude oil prices. India is still an energy dependent nation, importing ~83% of its crude oil requirements & accounting for 32% of our imports.
This dependency impacts the quantum of imports, and thereby trade deficit numbers. Estimates say that for every $10/bbl increase in crude prices (beyond the $100/bbl mark), the impact on India’s GDP could be 15-20bps, on retail inflation around 35bps, and wholesale inflation by 125-130bps.
High inflation is already playing its part on limiting Indian economic growth. Real GDP growth for FY22-23 is expected to be at 7.2% and consumer price inflation is projected to be at 6.7%.
Decreased excise duty on petrol and diesel, ban on certain agro exports, and other supply-side measures have been initiated by the govt to reduce the negative impact on growth.
Nifty has corrected close to 13% from its recent highs, while the small-cap indices have corrected by more than double that percentage.
As per analysts’ estimates, Nifty50 is trading at ~ 20.5X its one-year forward EPS. and post Q4FY22 results, earnings estimates have been reduced only by 2 to 2.5%. Nifty EPS for FY24 is expected to be around the Rs.900 mark.
With rise in interest rates do you think it would dent valuations?
A higher interest rate cycle does impact valuations, more so in the case of rate-sensitive sectors, high growth as well as high debt companies.
Technology-related stocks are the first casualty due to expectations of subdued cash flows and lower dividends. Expectations of rate hikes coupled with higher wage cost inflation have resulted in a tech sell-off in the US.
In India too, investors shunned stocks with higher price-to-earnings ratios, and are transitioning into value stocks that are debt-free, strong on the balance sheet, and are able to maintain their operating margins.
The rate hike by RBI last month in May was the first hike since August 2018. Over these 45 months, the Repo rate was cut from 6.5% to 4%, and with an unabated rise in inflation, the monetary policy committee made it a priority to normalize rates.
Valuations are a slave of earnings, and a hike in interest rates is sure to impact the revenues and profitability of companies.
FII selloff in India is part of a larger global selloff. When will FIIs reverse the trend and does that mean that FII heavy stocks where they have a double-digit stake could remain under pressure?
After a stupendous year of returns post the stock market crash in March 2020, murmurs of tapering of liquidity, and interest rate hikes by the Fed and other central banks, resulted in investors cashing in their gains.
In India too, the same scenario unfolded, with FIIs continuously selling in equity markets. Since April 2021, with the exception of September 2021, there has been relentless selling by FIIs in each month, totalling a mammoth Rs.3.88 lakh crore. Year to date, the total selling by FIIs is Rs.2.44 lakh crore.
However, the bright side was that, this selling was lapped up by a DII buying of Rs.1.97 lakh crore Year to date, and Rs.3.15 lakh crore since April 2021.
The participation of retail investors through direct equity, and the constant flow of a substantial amount into mutual funds negated the FII selling to a large extent.
This leads us to assume that domestic investors are here to stay, and any pressure exerted on FII heavy stocks by their selling, can be countered sufficiently.
This global sell-off by FIIs has come on the back of weak economic growth and recession fears, emanating due to rate hike cycle, overvaluation in asset prices – equities, commodities, real estate, and alternate investments.
This outflow could continue for some more time with sticky inflation and tightening of excess liquidity in the near term.
There are plenty of stocks trading at double-digit discounts compared to their 52-week highs. What is the right strategy to be followed when buying a falling knife?
As of 10th Jun 2022, 474 stocks from the Nifty 500 have fallen greater than 10% from their 52-week highs, and 159 stocks are just 9% away from their 52-week lows.
No sector has been spared, with stocks from Finance, Healthcare, Realty, Retail, and IT bearing the brunt of the selling. Of the 500 stocks from this index, negative returns have been delivered by - 262 stocks in a 1-month period, 317 stocks in a 3-month period, 392 stocks in a 6-month period, and 273 stocks over the last year.
The market is currently weak owing to interest cycle reversal, FII outflows, high and persistent inflation, the Ukraine-Russia war impacting supply chains, and projections of weak global growth and recession fears.
At this point, investors who are not savvy or active in tracking global cues or are investing for the short term can show restraint in deploying fresh capital into equities, till the tide turns for the better.
Long-term investors with at least a 2-3-year view can initiate small buys, periodically, and accumulate good quality stocks, with a healthy balance sheet, good product portfolio, and strong management.
Investing in quality at this time is of utmost priority, not just to safeguard capital in the short term, but to emerge successful when the headwinds dissipate, and economies get back on the growth track.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)
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(What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)
...moreDownload The Economic Times News App to get Daily Market Updates & Live Business News.
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price
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