What to watch out for from Fed and how to avoid Indian equivalent of meme stocks

“In auto, if you are betting on EV, stick with the legacy guys. Even if it is a very well funded startup, you have to see their delivery and that we would not see for quite some time. We have seen the explosions in the bikes, we have seen the non-delivery coming through. It becomes tough for us investors,” say market expert Ajay Bagga.

The big event that the markets are watching out for is, of course, the Jackson Hole Symposium. How much significance should we really give to that particular event back home as well?
It is a very big event for the global markets. It sets some long-term policy direction by the Fed and also 45 other central bankers are attending this and so we will get a lot of information, a lot of news flow. The markets are at a standstill in anticipation of what will come out. You will not get any tactical moves. You will not get an idea of what happens in September at the Fed meeting, rather it will be a policy setting speech.

The 2018 speech really laid down a lot of ground work and 2019 then set the ball rolling. 2020 was very critical in the way that the first time the Fed said that instead of targeting 2%, we will take an average of 2% and if you see a lot of problems in the US in terms of money supply induced inflation, that part comes from that change in the Fed’s mandate.

We will look at what Powell speaks about. The other Fed presidents and governors have set the tone right after July when the market went up thinking that it is a Fed pivot. The Fed is talking about softer rate hikes and rate cuts sometime in the middle of next year. All the Fed governors have been working overtime to disabuse the market of this conclusion. They have been saying that we need a higher rate for longer and inflation is very far from the 2% target. I think those will be some of the key works.

One figure I would look at and maybe dwell on is the Fed’s studies on unemployment rates versus inflation and what is coming out; why is it important the Fed has forecast an unemployment rate of 3.9% for next year and 4.1% for the year afterwards while its own studies are showing that a 5% unemployment rate is required to control inflation. I think the Fed has been behind the curve. They have lost a lot of credibility and Powell will try to address the criticisms. Market has more or less discounted it all so it would not be seen as hawkish.

This year the rice or the paddy cultivation has been below normal.
Yes about 13% less area has been sown because of the monsoon deficiency in certain key rice areas. Overall, if you look at the kind of drought situations that we are seeing across the world, we are expecting agri commodities to go up very sharply.

This year is looking to be a very constrained year right from cotton down to staples. We are seeing a lot of challenges for agri commodities in terms of production. Big swathes of the US, Europe, China and south-east Asia are facing very severe droughts. We are going to see some trouble ahead and the government has moved early.

What is your take regarding some of these metal names and how are you viewing the entire cycle for the metal space?
The big issue is smelters shutting down, plants being shut down across the world because of lack of power or the cost of energy going too high as we are seeing in Europe. We saw some of the remaining US steel makers hiking their prices sharply, given how high the energy costs are going. That is one of the positives on the supply side. But we have export duties on certain metals and that becomes a constraint.

The second big part is the Chinese stimulus; the 19-point programme which they unveiled on Wednesday at first looked like a damp squib of about $136 billion but if you add in all the factors that are mentioned in the 19 points and the earlier stimulus, it becomes a pretty big infrastructure package.

Now the key will be how much of it gets rolled out this year, how much is just cosmetic but it looks like banks will open their coffers for the infrastructure sector. The local governments are able to raise about $229 billion which will again go into local infrastructure. A lot of money in China comes in terms of stimulus which is normally very positively correlated with global metal prices.

So, supply constraints and demand side promise of the Chinese stimulus leading to better demand offtake is what is driving our metal stocks as well.

China wants to stimulate their economy; Europe is on the brink of a recession. How will the factors play out? What is a more meaningful template for us to focus on?
Overall what is saving the global economy and why we are still marginally in the positive is that we are still very accommodative in terms of the huge money supply which is still sloshing around.

Very little quantitative tightening (QT) has been done so far and it will stay very little for the next couple of years. Even though fiscal deficits have gone down this year marginally and the cash flows are drying up, it takes time.

Second, the interest rate hikes will also take time. They are just about starting to make an impact. Quite clearly, if you look at the real interest rates, the world stays hugely accommodative. If you look at the amount of money that is there and the deleveraged corporates, we still stay in a pretty good shape.

The energy costs are huge, they are debilitating. In fact today, when the UK removed their price barriers and increased the energy costs, we are reaching a level where households might end up paying 300-350 pounds a month in terms of energy costs which is more than mortgage payments or rental payments for a lot of those households. So it is going to become an issue.

The fuel recession in Europe is very stark and it gets worse in the first quarter of next year at the height of the winters. So, where will China find markets? If the US consumer or European consumer slows down, then Chinese goods also get constrained. A lot will depend on the US and the European consumers.

Looking at the stocks which are patronised by the traders – Reliance Power, Suzlon, even Voda Idea, which is a weak number three player now – one wonders what is going on? When the tail starts wagging the dog, you got to ask what is right and what is wrong.
Absolutely spot on. I am happy you are bringing it out because you are saving the unwitting investors. It is something like a meme stock frenzy; only in the US, it is the retail who are taking on the institutions. Out here, we do not know which are those interested hands which are buying these but retail also gets sucked in.

Again I would say for the fundamentals that these kind of so-called priced-on vision or priced-on transformation kind of stories have to be avoided by the retail investors. Maybe the smarter money will get in and extract their pound of flesh but this is more like the meme stock mania that we are seeing on the US markets with bankrupt companies getting bid up.

If we were to fall a little bit more, what would be on your buy list?
I keep buying regularly, but in quality stocks. We must keep highlighting these things because we believe in transformational stories. Think of the hapless retail investor who just sees the price movement without any idea and it is unanchored from fundamentals. So unless responsible anchors like you are warning people, it is a position of disaster.

I keep buying and my portfolios are very long. My view will not change week to week and I have very little interesting news to offer in that sense.

Has your view not changed on Eicher Motors as well? On Friday, the Street was nervous about the high level exits. Do you still believe in the long-term story there?
I would not talk about particular stocks but overall, about auto. Sometime back, I had said that maybe the third to fourth quarter is when auto will start looking interesting but the market ran away even before the volumes recovered. If you plot it on a 10-year or a 5-year basis, you realise the kind of mayhem that has happened on the two-wheeler stocks.

If you are a premium player on the two-wheelers, life becomes tougher with raw material costs going up. I was thinking we would have a late rally, but auto has really surprised us and the long-term positions did well. So, I am not complaining but I was surprised. Overall, EV is turning into a big bubble globally and not only with us.

One can get funding for anything to do with batteries or electric mobility. It had become quite dangerous, I was talking to one of the biggest companies which every two-three weeks announces a new deal in the EV space. My friends there are looking at something like 200 deals a month and they were explaining to me that in the two-wheeler space, it is the top three and then it just falls off. The next 48 together have virtually no funding and they are like small time operations, running a few hundred bikes but trying to get the EV tag and that kind of valuation. So there will be froth.

I would say stick with the legacy guys. Even if it is a very well funded startup, you have to see their delivery and that we would not see for quite some time. We have seen the explosions in the bikes, we have seen the non-delivery coming through. It becomes tough for us investors, PE funds are easy, they keep on funding them at higher and higher levels till you become a unicorn.

So in auto, that is the big issue. We are giving huge premiums to anybody with EV stamped on them. Watch out for that, I would say we are 10 years, 15 years still into the revolution, it would not happen overnight, it is going to take time before we say bye to the ICE engines. It is going to take time and very few will deliver. The legacy guys have delivered, they are cash generating machines, they probably will do much better.