By Unmesh Sharma
The global macro situation remains tough. After the false dawn in late July, we saw the re-emergence of Inflation risks. This led to the Fed hardening its stance materially- as expected by our team at HDFC Securities Institutional Equities (HSIE). We now expectedly find ourselves in the midst of a long and arduous fight against inflation with the Fed using the twin weapons of Rates and Quantitative Tightening. The cross winds were anyway blowing at full force. Markets were used to coordinated action by Global Central Banks since the 2008 crisis- that alignment has dissipated with the ECB, BoJ, China, and the US (and indeed India) fighting battles of different kinds. Add to that, some self-imposed volatility of the kind we are seeing in the UK and China. The risk-off sentiment and related rally in the Dollar Index has spooked investors.
Our conversations suggest that there are two questions top-of-mind for Institutional Investors at this time. 1) Can and Has India decoupled from the rest of the world? And 2) How do we navigate this environment?
On the first: On an absolute basis, India finds itself in a much stronger position than the taper tantrum of 2013. Demand seems to be holding up with stronger domestic fundamentals and well-capitalised banks and corporate sector. The absolute levels of Invisibles receipts, FDI flows, and reserves are stronger and the participation of domestic investors protects against extreme volatility in FPI flows. GDP growth and Inflation have risen but are stable and we expect RBI rates to peak at 6.5% in this cycle with fair visibility on this.
On the other hand, there are emerging concerns on the delta of some of these factors: reserves have depleted fast in the last few weeks as the RBI intervenes in the FX market, the CAD has deteriorated and a global growth slowdown will invariably impact exports notably services. India is indeed in a better situation relative to 2013 and other EMs currently- indeed our weight in the EM indices is now nearly 15%. But on balance, India may have decoupled from its past experiences but continues to remain well entrenched in global EM equity flows and cannot remain completely immune.
On the second, we can see why investors are having a hard time. While the market has come off, it is not cheap. In the uncertain environment that we face currently, the usual rule of thumb we use is that valuations should be 1 standard deviation below the long-term mean.
To paraphrase Greek philosopher Heraclitus in our context, the only thing we can accurately predict is volatility. Invest accordingly. A bottom up approach focused on value and domestic economy-facing sectors should continue to work well. This is reflected in our model portfolio where we are underweight on stocks at the high-risk end of the duration curve (like new-age technology), consumer (staples and discretionary), energy, NBFCs, and small banks.
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We prefer Large Banks, select IT names, Industrials, Real Estate Power and Autos. And we continue to believe that long-term secular thematics (like City Gas, Financial Inclusion via Insurance and Capital Markets and adoption of ‘cloud, digitalization and cyber security’). “Industrials over Consumer” is our big positioning call- the HSIE team has analysed capex trends in detail across three thematic reports. We see multiple capex engines operating in parallel. Sectors which are leading the private sector capex recovery are metals, power, telecom, cement, autos and oil & gas. Additionally, public sector capex is primarily being carried out in roads, railways, power, defence, and various rural welfare schemes. We believe the market weakness should be used to participate in these structural themes.
(Unmesh Sharma is the Head of Institutional Equities at HDFC Securities. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)