Besides the Fed, the ECB has acted on interest rates too and they have gone ahead and hiked the rates along with the Bank of England. How do you see the pressure across the European bourses now and early part of 2023? Growth plans are starting to hurt more and more, how do you see that affecting the Indian markets?
Let us look at it this way, the global growth has been indeed affected but that is an event that is quite unrelated. Why I am saying this is because it does appear that the central banks globally have misread the inflation surge and had been late in reacting to addressing the inflation problem that is why we are still seeing large jumps in central bank rates. 50 bps is large jump when it comes to interest rates whether it be by the Fed or it be by the ECB. In India we have seen a 35 bps rise in the repo rate. Having said that what needs to be done is that the economies to have a sustainable growth, what is really needed is positive real interest rates and not negative real interest rates.
Thankfully in India we are almost through into that game and the real interest rates are just about turning kind of positive. You can take any measure of that real inflation rate, it can be linked to the central bank’s rate versus the bond yields, it can be 10-year bond yield or you take any other measure we are just about going to hit the positive territory when it come to the interest rates.
Now that will sound good news for the positive spin on the economy which comes from capex fed by consumption, consumption leading to sales growth, PAT growth and so on and so forth. So the cycle starts churning positively. Somehow that cycle has not yet started when it comes to the developed economies because they are still struggling with negative interest rates and probably they will take a little while longer to do that.
How do you think markets are absorbing the macros data, the kind that we are seeing in recent times? Do you see them factoring in most of it? Are there negative surprises that you see on the horizon that could dampen the current sentiment in the markets?
I think valuation has been the bone of contention when it comes to equity strategists here in India, some would say that Indian markets are now accustomed to having high valuations in a situation where we have dried FII flows unlike for four-five years ago when FII contribution to the overall markets capitalisation would be high, it is no longer the case anymore.
On an incremental basis if the FII flow does not matter at all for the Indian markets so if the domestic investors have been pushing up the valuations for the market there has to be some underlying reason and I believe that underlying reason has to do with the fact that most of the listed space companies that you find pushed up because in the high valuation territory are the companies who have been delivering solid profitability growth.
So I tend to believe that while one needs to be a little cautious, Indian markets still offer that upside.
How far are we in India from peaking in that rising interest rate cycle, how would you suggest dealing with the interest rate sensitive stocks with the kind of outlook you have on it?
There is an element of overvaluation that has already crept in. The other fear that you have on the bank sector is that while the credit growth is better relative to what it was in the past, NIMs are likely to now start getting compressed because the personal credit had not moved thus far. NIMs are moving up quite sharply, they are catching up so the NIMs contraction will happen. We are witnessing low NPA levels so that is not a factor that is going to help you decide whether to remain invested in banks or not but the phenomenon of NIMs getting compressed will mean that their ability to act to the book value will start getting constrained here onwards.
So that leaves the other sectors to look for as the rotation is something that will continue to happen in our markets. I think sectoral rotation is what we are due for right now in the markets and that itself should drive the markets up 5-7% just like that by sectoral rotation itself. Now the next trigger could be budget.
