ETMarkets Smart Talk: Decoding how US Fed rate hike will impact Indian markets: Rahul Bhuskute

What is your view on US Fed policy meeting? What is the central bank trying to achieve?
I think the Fed is basically trying to achieve two objectives – the first one is obviously to tame the persistently high inflation, the magnitude of which appears to be much more than the earlier expectations of the Fed.

It is not just combating the current inflation but also the future ones by ensuring inflation expectations don’t get entrenched.

To that extent, unless the US Fed is confident of achieving its stated objective of 2% inflation, it will continue both its rate hike cycle and also its quantitative tightening (“QT”) programme.

The second objective that I think is that the US Fed has been trying to achieve especially over the last 2 – 3 policies is to communicate to the market that times are tough and therefore, to remove expectations of rate cuts or easing of monetary conditions anytime soon.

How will the US Fed rate hike impact India?
In terms of India, any aggressive US Fed action will have direct and indirect consequences for our markets.

The first impact is on the currency, and this is important for RBI’s main objective of maintaining macro stability.

The Fed hike cycle has been ahead of RBI cycle and the US rates have gone up much faster than Indian ones. As such there would be continued depreciative pressure on the Indian rupee in case of dollar strength emanating from Fed policy.

While many quarters have been celebrating the relative strength of the rupee to those of EM peers, please note that this has come on the back of a net spend of around $100 billion of forex reserves (and possibly gross of around $130 – 150 billion).

With forex reserves covering only 9 months of imports (vs the 19 months at the start of the Fed hike cycle), RBI vigilance is in order to ensure exchange rate stability.

The other pressure valve for the debt markets are the rates. Yields have tightened in the Indian markets on account of lowering oil prices and index inclusion narrative.

Basically, the RBI will continue to find it difficult to manage both interest and exchange rates and might have to let go of one of these.

In terms of equity markets, the impact is likely to be more indirect with the Indian indexes reacting to downward movement in the US and other markets on account of Fed tightening.

Any risk-off environment will affect Indian markets too and the recent “decouple” narrative might be severely tested.

Do you see further tightening by RBI and will that derail momentum on D-St?
Yes, we believe it will be premature for RBI to take any pause at this juncture. August inflation print of 7.0% is much higher than the mandate given to MPC to keep inflation in the range of 2.0%-6.0%.

On top of it, Sep’22 inflation is likewise projected to stay above 7.0%. If we look at the core inflation, it continues to remain sticky at around 6.0%.

While the recent fall in crude oil prices is likely to provide some respite, uneven rain distribution and increase in services consumption can continue to put inflationary pressure on food and services in the near term.

Dollar strength and the continued bleeding of forex reserves to protect INR stability also means RBI is under pressure.

The equity markets are not fully pricing in the rate hike cycle of the RBI. As inflation remains stubbornly high and above the level that the RBI is comfortable with, this could have a near-term impact on market returns.

Mutual Fund data is encouraging when it comes to equity funds but the pace seems to be slowing down. More money is moving towards debt – why are investors putting money in safe haven?
Equity mutual funds are still witnessing net inflows, although the pace has slowed down. Growing macro uncertainty and increasing geopolitical risks, are making investors wary and hence we are witnessing higher allotment towards low-risk assets, in the short term.

Debt funds are basically an opportunity cost to equity funds from an investor’s perspective. So as yields move up, some investors chose to switch to debt or asset allocation funds.

Sensex reclaimed 60K recently while Nifty50 also managed to hit 18000 for the first time since April but faced tremendous pressure in September. The recent price action makes benchmark indices vulnerable to profit booking. Where do you see markets in the medium term?
The medium-term indicators appear positive for the markets, though in the near term we may witness some profit booking, after a nearly 15% rise in the markets from its lows in June (against 3 – 5% rises in all other major markets).

The macroeconomic fundamentals and earnings momentum remains strong for India, driven by robust domestic demand and steady CAPEX driving investments in the economy, though valuations of the Nifty based on one-year forward earnings are breaching the “expensive” zone.

The markets could see a bout of short-term profit booking, however, this will remain a Buy on Dips market, given strong fundamentals over the next 2-3 years.

Global strategists and international investors continue to view India as a unique, structural story. The “Overweight China, Underweight India” trade hasn’t really worked for foreign investors, and they have now returned to India given its relative geopolitical stability.

In a summit, FM asked India Inc. why they are not getting into manufacturing. Do you see increase in buying interest in this sector?
Yes, the manufacturing sector is set for a resurgence driven by strong Government capex, a revival in overall industry capacity utilization, rising private sector spending and large outlays on PLI schemes.

We are seeing strong domestic demand growth and early signs of a possible Europe +1 strategy pivot, along with a fast-growing China +1 strategy, which will drive manufacturing investment in the country.

Which sector will produce the next set of multibaggers?
As discussed above, the manufacturing sector offers a lot of opportunities to make good returns in the medium term.

We continue to maintain our bullishness on the Indian financial services sector, especially private banks that continue to offer a convincing growth theme at relatively decent valuations.

What is working in favor of specialty chemical space? What are your top bets?
Three points are working in favour of the sector – i) China Plus one strategy; ii) High cost of manufacturing in Western World; iii) Govt of India focus on import substitution and export promotion.

Where is the smart money moving?
Over the past couple of months, investors have increased their bets on the Financials, Auto, and Consumer sectors, which have delivered strong returns.

As various macroeconomic factors like GST and credit growth have shown renewed strength, domestic-oriented sectors have fared better and we have seen a greater move of funds towards these sectors.

Asset allocation funds should do well relative to pure equity, given elevated valuations and improving yields. Duration funds and corporate bond funds are also likely to see more interest going forward.

On the insurance side, long maturity, guaranteed return products would see traction as opportunities emerge to lock into higher rates.

Please share your investment mantra, any checklist you follow before buying the stock?
We buy equity in both our traditional fund – which is effectively an absolute return asset allocation fund – and in ULIPs, which are similar to benchmark referenced mutual funds.

For traditional funds, we need to be confident that the stock has the potential to deliver absolute returns over a one-year period or so. For ULIPs, the active weights (over / under in comparison to benchmark) are maintained depending upon sector and stock conviction on a relative basis.

In terms of the process, we would like to believe that we follow a robust investment process to identify stocks for our portfolios. Starting with a study of the macroeconomic factors such as GDP, inflation, interest rates etc.

We perform a top-down analysis of the sectors most likely to benefit from such macro growth. This is then ably supported by a strong bottom-up company-specific analysis where we identify the growth drivers for a company, assess its management capability and analyze in depth its financial statements including balance sheet health and long-term growth prospects.

Valuations are an important metric that we focus on, and we typically prefer to pick stocks that offer growth at a reasonable price (GARP).

For the absolute return fund, we also rely on our proprietary asset allocation models to ascertain the allocation to equity.

How important is booking profits in MFs or direct investing or should one adopt a buy-and-hold strategy?
We recommend making financial decisions based on an individual’s goals, both short-term and long-term. Equity investing is typically a long-term investment as returns accrue over a 5-10 year period while our short-term goals can be met using debt instruments.

In either case, an exit is recommended only when the said goal has been reached. As long as the goal is still active, it is advised to stay invested and avoid timing the markets.

This is especially true for uncertain times, as we are witnessing at present. It’s best to maintain the pre-determined asset allocation, rather than getting swayed by greed or fear.


(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)