Wealth Management, Investment Advisory & Portfolio Management Update on Fed Interest Rate – March 2022

Here are our views, as SEBI Registered Investment Advisors on the fed interest rate moves, market bounce back, IPOs, new age listing and the outlook for the upcoming financial year.

Fed Interest Rate Hikes

Globally, central Banks in general, and Fed too, are averse to a high-interest rate scenario, as they need to service high debt. Inflation levels in the US are at very high levels, even before the Ukraine war. Now given the higher price pressures post War, there would be rate hikes. The US Fed interest rate takes some comfort from the lower unemployment rate and higher economic activity giving them some leeway to introduce hikes. They also wish to reduce the unemployment rate to the extent possible and bring inflation down to 2%. The Fed has now stated that there could be more hikes than assumed in their December meeting. Now people will speculate if the next rate hike will be 25 bps or 50 bps but that is pointless in my view. The markets factor in these trends over time; after all high inflation dampens demand which in turn impacts corporate earnings.

Market Bounce Back

Sensex hit an all-time high, showing that India has been the best among all big and emerging markets. It was also the monthly expiry day of F&O which might have influenced the movement along with the latest US Fed’s indication that interest rate tightening may slow down. However, the market is getting increasingly polarised. While even Nifty is on the verge of an ATH, the market breadth is not secular. 55% of Nifty is still below its high in October 2021. These three stocks themselves are 25% or more away from their October 2021 peaks. This indicates polarisation is impacted by massive amounts of passive inflows.

Nobody can predict the short-term geo-political trajectory of the war. Surely there is ongoing uncertainty about how this is going to end. There is still uncertainty on whether Russia will withdraw or whether Ukraine will blink. However, the Fed has clearly noted that this situation will contribute to inflation. The chief weapon to combat inflation is hiking interest rates and a contractionary monetary policy by reducing the money supply which they intend to do. 

Markets discount news on a near real-time basis. The market has already discounted the risk of outright nuclear war and extreme hawkish behaviour by the Fed. Traders can benefit from taking positions based on what may or may not happen, by positioning themselves as markets keep moving up and down. However, investors need to trust the management of companies to help ride out the roller coaster and keep watching their performance on fundamentals.

This does not mean that markets will have an easy year in FY23. Any massive push by the Fed, China’s support for Russia, or rapid rate hikes could bring a fresh round of correction. Contrary to these all-time highs, our view is that the geopolitical and global recession bad news is still not over. So our outlook as of now is stable and not gung ho. The Ukraine War is still raging and one must continue to focus on companies with strong fundamentals. 

On New Age Companies

These companies have a combined market cap of nearly two lakh crores with little to show by way of profits. I always recommend investing in companies with low debt, real cash flows, real profits and growing profits. PayTM specifically has no clear business model yet and it will indeed take time for a retail investor to get that clarity and understanding. Meanwhile, their stock price may drop further than the target you referred to. In general, we stay away from such glamorous IPOs because not much is known about the promoters. Public listings bring out far more truths than ivory tower conversations. Then there is the massive risk of not executing, given that some valuations have been projected 10-20 years out into the future. IPO listing does not mean that the market is all sewed up. The short answer still remains a NO. 

The IPO Pipeline

We had nearly 45 IPOs so far that together raised more than one lakh crores just in the first 9 months of the financial year. This is 3x the issue size and nearly 2x count-wise, compared to the entire previous financial year. The push to launch would likely continue mainly because it still gives an exit route to the PEs. With global central banks starting to hike rates to suck out liquidity, PEs may have a tougher time raising new rounds, prompting them to make more exits. Therefore even though there could be some short-term delays, the next few quarters appear to be quite busy.

Outlook for Next Financial Year

The markets have not yet recovered from the financial year peak they touched on 18 October 2022. This is even after the 1000-point rally in Sensex on the eve of Holi. From the financial year beginning that was a return of nearly 27%. We also saw the peak of the IPO frenzy then. Since then it has been downhill due to fears of inflation, interest rate hikes, geopolitics or simply mean reversion. But there is still uncertainty and confusion on the global scene. Because nobody can predict macro-trends, the recommended course for a long-term investor is to stay invested in good-quality stocks.

If we manage to close the financial year with a nearly 18% to 20% return, that would not be a bad close at all. Every year is a new start, but the renewed political stability post-election results, a potential ease off of geopolitical tensions, and stable oil prices should put us back on track with the India growth story. The massive growth in direct tax revenue of 48% and another 41% in advance tax points to a growing economy.

Once FIIs start rebalancing their global equity assets, we can expect more inflows which could push up the Indian markets. On the flip side, geopolitical risk, and runaway inflation are key risks. Roughly 60% of the Nifty will get impacted if oil prices shoot up again. Any surprises on the China-Taiwan front could spell a bout of selling. The massive spike in the volatility in China indices is of concern too.

China has just reported a huge spike in the number of Covid cases. While India has 350 reported cases, China has 100x that number as of today. The bad news from China is not yet over and their markets are significantly down. SSE Composite is down 14% and Hang Seng is down 29% in the last year. The interest rate hike saga in the US is also not yet over with a few more twists and turns awaited. These two could change the sentiment and derail the movement in Indian indices. Any unwinding of the markets may hit most of those stocks which are currently benefiting from passive inflows but which may have poor fundamentals.

Conclusion

Long-term investors must not worry about market bounces and crashes, or glamorous IPOs. As we turn into a new financial year, it is key to stay connected with a cardinal investment philosophy like Roots & Wings and stay invested in good and bad times.

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