Recession fears: No inflation, market more worried about recession: Viral Berawala

“If the conflict resolves, the possibility of an inflation hard landing could decrease. So, from October onwards, the inflation figures would be very good due to the base effect and will tend to continue to drop. The question is a little different in our opinion. The problem is about the hard landing, “explains berawala viralDirector, Dynamic capital

Although all commodity prices have fallen significantly since the peak – agricultural prices, vegetable prices and finally even crude prices are cracking, the market is behaving very hesitantly. Why is that?
The London Metals Index (LME) is down 21% in the last three months and many commodities are at a 52 week low and the metals index itself is flat or slightly higher low for 12 months.

So clearly all industrial metals are trading lower and that means we have the worst of inflation behind us and from there we should start to see it slowly coming down until at least the October period. -November, then we should see a strong correction .

Now, due to the Fed’s aggressive stance on inflation, many other central banks have also tried to rapidly raise rates to defend their currencies and they are taking an aggressive stance on rates. But it could trigger hard lending and push economies into recession and the idea is likely to keep markets in check.

Otherwise, there is a lot of good news. All commodity prices – both hard and soft – are down. For example, wheat prices in the United States fell 25% in one month. Thus, not only industrial companies, but also companies in contact with consumers will benefit. The debate now is whether we will enter a recession or not. The market is leaning towards the idea that we are probably going to enter a recession.

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So you’re saying inflation is becoming less of a concern for the market now, but the recession or the major slowdown or the hammer approach that central banks are taking on growth to get inflation under control is becoming a bigger concern for the market ?

Yes, that is correct; that’s what people seem to think. So, while India is in an ideal position, it is not decoupled from the rest of the world. India has already absorbed Rs 3 lakh crore from secondary market sales, but this cannot last forever.

Even at today’s valuations, FIIs own $50-55 trillion worth of Indian stocks (Rs 50-55 lakh crore). If this type of selling were to continue and countries around the world went into recession, India would be no different and this would lead to the type of market movement we are seeing.

But valuations are below the two-year average. So based on exercise 24, Nifty is at 15.5 times and it’s actually below its average a bit towards half the standard deviation. Smallcap is less than 12 times forward. So while earnings may be slightly reduced, downgrades tend to take time, but valuations still become attractive.

On the one hand, we see that benchmark index valuations have moved closer to their long-term averages; midcaps, smallcaps also fell in the same proportion. Now people are saying that this downturn could lead to another downward revision to earnings estimates. Is this a valid rationale, because if further earnings downgrades occur, the possibility of further compression in valuations may also increase?
Let’s take it in two parts. Earnings degradation may be seen to occur at the index level, but the quality of earnings will change. A lot of this Nifty EPS move was driven by a few metals and mining stocks and a few of those big banks / High PE stocks, FMCG, consumer facing stocks and even the pharma industry for that matter have relatively participated in the rise in profits that has happened.

The downward earnings revision will likely be more in metals and mining, capital-poor stocks. Even if earnings degradation were to occur there, the Nifty EPS level market is not expected to decline much as some sort of transfer of value from metals and mining to consumer-facing stocks will take place. Thus, a migration from a low PE to a high PE will occur. While at the index level, earnings may decline, at the market level, markets could still hold.

You said value transfer will happen, commodity downgrades and maybe commodity user upgrades. So overall, not much of a downgrade. What are you nervous about in this fix? Where did you add positions and build your portfolio gradually?
We have started to increase the weight towards small caps now. We are running a multi-cap strategy and we have gradually started to increase rates towards small caps because mid caps are still in between. In fact, the midcap index is slightly more expensive than the Nifty index and a bit counter-intuitive. But there’s a lot of value in small caps and there are a lot of small cap companies where investments have been completed and where we’ll gradually see revenue or top line growth with earnings to follow.

It’s a bucket or a theme that we’re pursuing, where the capex is done and over the next two years we’ll see sustained growth because they have the capacity. Secondly, if you look at the sectors, preference goes to India over globally oriented sectors. Domestically oriented sectors would be finance, insurance, CV space and even building materials or engineering. So what’s more India inclined is the space we love and that’s where we deploy extra funds.

Give us some insight into how domestic silver comes to market. HNIs have been the strongest pillar of strength in domestic markets. Now people are getting impatient that if that faucet dries up and the FII sell doesn’t stop, that could be a big risk for the market as well?

Historically, many of us nationals have worked with the fact that if one-year market returns are negative, that’s when national flows start to slow or drop. This has generally been true for many years in the past. Another thing that works is that if the term deposit or FD rates for medium-term deposits are around 7%, then domestic investors start to gravitate towards fixed income rather than equities.

This time around, that doesn’t seem to hold true and most alternative asset managers – AIF and PMS – continue to see reasonably strong flows. It’s not just old money that’s called reloading in our industry and it’s not just existing clients who want to put more money in, but also a lot of new investors in alternative assets coming in.

So a lot of additional streams are coming into this type of category and it hasn’t stopped. So after the January correction, after a lag of two to three months, one would have assumed that the flows would stop, but at least in the alternative asset space, no matter who we talk to, it doesn’t. is not stopped. There has been a cut here and there, but gradually there is still a reasonable amount of money on the sidelines.

RBI Deputy Governor Michael Patra in the MPC minutes said he expects inflation to fall to 4% by 24 and below 6% or about 6% in here’s the last quarter of 23. If you give them the benefit of the doubt, then even if their forecast is 80-90% accurate, when will the market start pricing in inflation control?
First, we need to understand how inflation works. Inflation is an index that was very high in April 2022 and May 2022. Let’s say the inflation index was at 100 and it is at 115 in May 2022, so by 4% we mean that it will be at 120 in May 2023 Getting there seems difficult at the moment, but it is entirely possible with the metal price situation.

If the conflict resolves, the possibility of a hard landing in inflation could diminish. Thus, from October, the inflation figures would be very good due to the base effect and will tend to continue to fall. The question is a little different for us. The problem concerns the hard landing.

Normally we are able to control inflation. In 11 of the last 12 cycles of Fed rate hikes, markets have performed well. Why is it different this time? This time it is different because it is not demand driven inflation but due to supply constraints in metals and mines, mining products as well as commodities or even manufactured goods such as semiconductors.

Bringing down this type of inflation can only be done by suppressing demand and on a weak basis, if you suppress demand further, the risks of recession would increase. So if the markets get the idea that it’s not going to be a recession, it’s not going to be a long period of little or no growth and maybe one or two bad quarters, things will come back. At that time, we should see the markets recover.


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