Thursday, Aug 18, 2022
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Market Volatility, Interest Rate Cause For Concern In Short-Term, Says Tata MF Report

High liquidity and low interest rates have led to inflows of equities in emerging markets such as India. That said, there is reason for some concern in the short-term due to change in the interest rate scenario, but the medium- to long-term is likely to remain unaffected, according to the Tata MF report

The recovery in the investment cycle has been driven by solid cash flows in the corporate sector, and the government's countercyclical fiscal measures have been incrementally favourable on the industrial and/or capital goods sectors.

Recovery in the investment cycle led by healthy cash flows in the corporate sector, and the government’s countercyclical fiscal policymakers has proven to be incrementally positive on the industrial and/or capital goods sector. The large private banks have also held up during the economic downturn. 

Tata Mutual Fund has now come out with an equity outlook report on the various sectors that had a bearing on the equity market. Here’s a brief on the same

Commodity Market

Commodities traded in the US Dollar index reached new highs, as risk appetite continued to deteriorate. With a likely resolution to the Russia-Ukraine conflict looking remote, and China’s concentration on a zero-covid policy remaining same as before, fears about demand-supply disruptions have exacerbated global economic growth issues. In addition, high liquidity and low-interest rates have also led to inflows of equities in emerging markets, such as India.

Crude oil prices were also up more than 11 per cent for the month of March. Prices were supported by a European embargo on Russian crude imports, which is likely to be implemented this year. Base metals have been trading down across the board, mostly owing to mounting fears of an oncoming recession, which has hampered industrial activity, especially in China.

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Nifty-Fifty Valuation

India’s stock market has seen its valuation premium to other developing economies fall sharply in the last few months, owing mostly to increases in local bond rates and oil prices.

The Nifty 50 forward PER of 17.5x is marginally lower than the 10-year average, but still higher than the 15-20 year average, the report said.

The Nifty50 aggregates growth has slowed from 18-19 per cent to 14 per cent over the previous six months, and the current value adjustment provides some protection for stocks.

In the short term (96-9 months), volatility and range-bound movement may become the norm, the report quoted Gurmeet Ramakrishnan, chief economist at the State Bank of India, as saying.

Macro Sector 

The Reserve Bank of India (RBI) raised the repo rate by 40 basis points to 4.4 per cent for the first time in over two years since the COVID-19 pandemic. Since February 2022, supply shocks affecting edible oil, fertiliser, and fuel prices have prompted the central bank to take this mid-cycle measure. 

Inflation is running below the target rate across the board, and Japan, Switzerland, and the Eurozone have negative central bank rates, the report said.

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The Impact Of Valuation
 
When interest rates rise, the valuation of price-conscious or theme sectors (sectors with profits expected in 3-4 years) is influenced significantly, much more than for enterprises with stable growth or steady profit generation. 

According to the report, growth, quality, and theme sectors have performed better in the low-interest-rate environment during the previous 5-6 years. As the interest rate cycle will shift, the capacity of those sectors to outperform may be greatly reduced. The value segment and consistent profitability at appropriate values could outperform.

“In a market like this, which may stay range-bound for some time, the best method to manage or build is to invest in somewhat more value-conscious sectors or companies, as well as cyclical sectors, since we are witnessing a cyclical rebound,” the report quoted John Bostock, chief investment officer at The Binstock Group as saying.

Key Points To Look At:

Given the early stage of the recovery cycle, a 100-150 bps increase in interest rates is unlikely to have an impact on real estate. The banking sector appears reasonably valued and has not received its due; credit growth revival and risk from fintech are key issues that should be clarified in 2022. Digital spending is here to stay, but valuations limit the scope for sectoral alpha in IT services, the report said.

New Trends 

According to the report, the commodities boom, fuelled by China’s recovery, has improved cash flows and return on investment in the industry. As a result, the capital investment cycle is expected to revive. The private sector is planning to declare greater capital expenditures for new facilities and factories.

“Some of the deep cyclical sectors, such as capital goods and industrials, are beginning to see more visibility in terms of order flow, and our portfolio weights in the sector are higher than a year ago. In addition, there is a new wave of capex in renewables (both public and private), automation, and PLIsectors. Pent-up demand and increased affordability are driving the real estate recovery,” the report says.

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