A critical week in front of us. What is your sense? Where does it go next week?
I am expecting volatility and I am still very cautious on the markets expecting a 25 bps rate hike from the Fed. They would not pause. The ECB has given a pointer to how the central banks are thinking so expect a 25 bps rate hike. The problems at the banks have still not been sorted completely. On Friday too Credit Suisse opened 5% down in European trade. So indeed there is some distance to be covered in restoring confidence in the US and European banking system.
Though there is not much direct linkage, domestic IT companies share a strong correlation with the financial health of the US markets. So one can expect some corrections in that space. And overall, FII flows are flowing out of India based on what is happening around the world. The good news here is that brokerages are putting across that India has a better macro and we can view India in the context of countries like Korea and Taiwan, which are very highly correlated to the health of the US economy.
So, maybe after a while we may again get inflows from FIIs. For the next week caution is advised and we may see highly volatile markets and this is definitely not the time to start taking fresh positions in the markets.
At the current time, riskier asset classes like cryptos are rallying, also gold is inching higher and crude has slipped below the $75 per barrel mark after 2021. So how are you reading the whole macro setup right now and not just the next upcoming week?
Oil is suffering primarily as Chinese demand has not come back as strongly. The Chinese numbers showed that retail was not up to the mark and on Friday we saw a reserve rate cut by the People’s Bank of China of 25 bps that comes into effect from March 27. So they are clearly trying to stimulate the economy to some extent and are not happy with the kind of growth that they are seeing so oil is suffering because of that.Also, we have seen US inventories going up and both in the US and Europe we are expecting slower growth. Though we do not anticipate a full blown recession. At least a 2% GDP growth year on year for the US is on board for the first quarter. So recession will probably if at all be a thing in 2024. But as we saw this week, the way things moved so fast was the risk. And frankly, Friday was a risk because FDIC normally takes over banks on Fridays to ensure that they get a full weekend and the market impact is minimised. So there was fear till yesterday but then with the 30 billion deposits that the big banks gave to First Republic I think that was a big sentiment booster.
Overall, about $164 billion was taken from the Fed discount window and the emergency window; if you compare it to 2008 the maximum was at about $111 billion so we have already crossed that. And apart from that the FDIC has pumped in about $150 billion into the bridge banks, into the three banks that it has taken over.
It has pumped in about $145 billion, so $300 billion of emergency support has already gone into the US banking system. Worth noting, that unrealised losses of the US banks as of December was $620 billion. While, the total combined profits of US banks last year were $260 billion. So clearly, the unrealised losses are quite perturbing.
Good thing is these are held to maturity securities. So if there is no bank run, there is no deposit withdrawal and then we continue till these securities mature off and the banks will be healthy again and that is what the Fed is trying. So I would say the situation remains one of caution. It is duration risk and interest risk. It is not a solvency risk this time around even for Credit Suisse, it was more a sentimental thing.
If the US banks issue was not there, you would not have noticed the Credit Suisse shareholders’ comments. It was more a fallout of the US banking that Credit Suisse got hurt further. Of course, it was a weak bank. But its solvency ratios, its liquidity coverage ratios are very strong at 150% so it was not in that kind of a scenario. But with the deposits going out, it will need more help from the Swiss National Bank. So having said all that, the macro is not good. Macro is slowing and expect domestic equities also to follow the Western equities downwards.
You are pencilling in a 25 bps rate hike next week. Interest rate or rather interest rate sensitive stocks will definitely be in focus. But outside of that what sectors are you looking at for next week?
There is tightening happening globally and therefore domestic sugar companies should benefit from that. And apart from that cement, capital goods, all the domestically oriented companies are what I would look at. But again, I am not giving any investment calls right now. The risk currently is too much. So, it will be better to wait for 7-10 days and see how things work out in the US and then take a call.
Clearly domestic companies will be the focus. IT will get hit from the US slowdown, European slowdown, especially the BFSI slowdown.
Stick to the domestic counters and the domestic consumption stories that is where one has to stay. Further, Indian banks are in pretty good shape. I think those will rally.
If you see across the globe, the one standout outperformer was Chinese banks this week and I think it is a matter of time before Indian banks also get that kind of interest. Right now it is more a risk-off that is hurting us but otherwise, fundamentally, Indian banks are a domestic story and one of the best domestic stories in our market. So I would still stay positive for Indian banks but take a call after a week-10 days.
