June30 , 2022

us fed: FII selling may continue till aggressive rate hikes by US Fed comes to a halt: Hemang Jani


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“FIIs have been sellers in Indian markets since October 2021 and have sold more than Rs 3.25 lakh core since then. Rising inflation and resultant rate hikes by US Fed are the main reason behind the churn of FIIs from emerging markets to developed markets.,” says Hemang Jani, Head Equity Strategy, Broking and Distribution, .

In an interview with ETMarkets, Jani said: “Inflation has touched a multi-year high leading to fear of economic slowdown. Moreover, the US Fed has hiked interest rates aggressively, resulting in sharp FII outflows in India.” Edited excerpts:

Market briefly bounced back and then corrected again as most of the negatives such as war, inflation, crude oil prices are still active. What is market factoring in?
The Nifty50 witnessed correction of almost 15 per cent from its recent peak of 18,100 in April’22 to touch low of 15,450 in May’22 on the back of multiple economic challenges like geopolitical conflict, surge in energy prices, raw material inflation, chip shortage, monetary tightening, rising interest rates, etc.

However, it recovered by about 7 per cent from the low, given healthy Q4FY22 earnings performance. Corporate earnings were in line with expectation and instilled a ray of hope as ultimately, earnings delivery is crucial for the markets.

We are in the sixth month of the year or 1H2022 – the first 5 months have been nothing short of a roller coaster ride for investors. What is your take on markets in the short to medium term?
The Nifty50 has been witnessing a roller coaster ride ever since its peak of 18,600 touched in October 2021. However, so far, despite huge volatility, it is down by just ~5% in 1H2022, thus showing its resilience.

We believe heightened worries on rising interest rates, elevated crude oil prices and liquidity tightening would continue to keep the market volatile and jittery in the near to medium-term.

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We expect the full impact of increasing input costs to be felt in 1HFY23 as 4QFY22 had some benefits of lower raw material inventory.
Thus, amidst adverse environment of volatile and challenging macro, earnings delivery would hold the key for the market direction. Till the inflationary scenario persist, weakness might persist in the market.

March quarter was relatively stable for India Inc. Do you see some disruptions, earnings downgrade in the forthcoming quarters?
Corporate earnings remained strong in 4QFY22 and thus providing a silver lining to the market. However, while the aggregate growth appeared impressive, it was hardly broad-based and was concentrated and led only by three sectors viz. BFSI, O&G and Metals.

There was a wide divergence between sectors adversely affected by rising raw material prices like autos, cement, consumer staples and durables, specialty chemicals and those not directly impacted/benefitted by rising prices including BFSI, metals, O&G and technology.

The full impact of raw material inflation would be felt in 1HFY23 as there would be no benefit of lower raw material inventory.

Thus, we believe, the next two quarters are going to see a sharp margin impact and corporate commentaries might get worse before it gets better.

Secondly, while the Nifty has not seen much earnings downgrade so far, the broader universe is clearly bearing the brunt of commodity cost inflation – a trend being visible since 3QFY22 corporate earnings season.

If the situation does not get arrested over here, we might start seeing some demand dislocation in an already weak economy.

And this, at some point in time, could lead to an earnings downgrade even for the Nifty. But so far, we remain positive on corporate earnings and expect the Nifty earnings to grow at 18% for FY23 on the back of a high growth base of 35% for FY22.

Where do you see value in this market? Any sectors that you things have entered a buy zone after the recent fall?
The Nifty50 currently trades at 19x FY23 EPS, which is at slight discount to its 10 year average P/E of 19.4x, thus providing some comfort. Auto is one sector where we believe recovery is visible on a gradual basis.

The sector is trading at ~24x P/E, which is at a ~5% discount to its historical average. We expect demand to improve for Passenger Vehicles on the back of easing supply chain issues.

MHCVs are likely to benefit from the government’s push for infra activities while LCVs should gain from the last mile mobility. The recent cut in excise duty for fuel also augurs well for CV demand though there is no immediate respite.

However, there would be slow recovery in 2Wheelers and tractor volumes. OEMs and auto component players are also indicating that the gradual improvement in chip supplies is projected from 2QFY23 onwards.

Full normalcy is expected to restore towards end-CY23. Further, Commodity cost inflation slowed in 4QFY22 and most of the OEMs indicated that the commodity prices are stabilizing and there should be some improvement in gross margins as the benefits of stable commodity prices and price hikes reflect in P&L.

FIIs continue to offload stocks in Indian markets. What is the main reasons — is it the fact that they are getting an exit, profitability, or it is just regular churn?
FIIs have been persistent sellers in Indian markets since October 2021 and have sold more than Rs3.25 lakh core since then. Rising inflation and resultant rate hikes by US Fed are the main reason behind the churn of FIIs from emerging markets to developed markets.

Inflation has touched a multi-year high leading to fear of economic slowdown. Moreover, the US Fed has hiked interest rates aggressively, resulting in sharp FII outflows in India.

GDP growth projections have also been slashed though India continues to be the fastest-growing economy. This relentless selling though has been counter-balanced well by DII’s continuous inflow, though the momentum is slowing down there also.

FII selling may continue for a while till the aggressive rate hikes by US Fed comes to a halt.

Do you see recession fears are real for global economies and India would also not be immune?
Amidst the rising inflation across economies, slowdown of China, supply chain disruptions, and other impacts of the ongoing war, currently what we are seeing is economic slowdown across economies.

Overall economic risks have risen sharply, but still recession fears are unwarranted currently. If the current environment prolongs for a longer period, then the economic situation might turn adverse and could lead to recession.

However, so far, global growth has been revised down to 3.6% in both 2022 and 2023 but not projected as negative growth while India still continues to be the fastest-growing economy.

What should be the ideal portfolio mix for long-term investors especially the ones who have just started investing or trading in the age bracket of 30-40 years?
As a rule of thumb, ideally the investor should hold a percentage of stocks equal to 100 minus their age. So, for a 40-year-old, 60% of the portfolio should be equities, while the rest could be debt or other relatively safe assets.

For a more aggressive investor, equity allocation can be as high as 80%. But those who have just started trading should not get too aggressive and hold a healthy mix of equity and debt.

Even within the equity portfolio, it should be well-diversified across various sectors along with the robust mix of large-cap and midcap.

The portfolio should be constructed keeping in mind various factors like earnings visibility, economic recovery, pricing power, balance sheet strength, and reasonable valuations.

What is the valuation metric that one should use to filter value picks excluding BFSI space?
To identify value stocks, one should look at stocks with robust growth potential having reasonable valuations.

For valuation one can look at PEG (PE/growth) which should be less than 1. Apart from PEF, one can also look at other valuations like dividend yield and P/BV.

What is the kind of rate trajectory you see from the RBI in FY23?
Since India’s domestic demand growth remains feeble, we expect a more cautious and calibrated approach from the RBI.

But given the highly unpredictable situation, RBI should adopt a more gradual monetary tightening approach, as during such times, the cost of taking a very strong stand may outstrip the benefits over a period of time.

Since the beginning of Apr’22, the RBI has hiked the effective policy rate by 80bps and is very likely to hike policy rates by another 35bp in Jun’22.

We believe that the maximum cumulative rate hikes left in this cycle amount to 110bp over the next 12-15 months.

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

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