01-01-1970 12:00 AM | Source: Yes Securities Ltd
Diwali 2022: Fundamental Top Picks By Yes Securities
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From households and businesses to governments and the central bank governors, the central challenge bothering one and all across the globe is inflation. Essentially the supply disruption on account of Covid?19, further accentuated by Russia’s invasion of Ukraine. Now that all central bankers are raising rates in tandem, the prevalent fear is that the sheer pace and quantum of monetary tightening will strangle the interconnected economy across the globe. 

Yes, there is a tiny element of plausibility lurking in that fear, but our sense is that inflation will peak on account of 1. Some Covid linked disrupted supply coming back onstream, 2. rate hikes done by central bankers, 3. China opening up its economy again at some point, 4. Softening of global commodities and 5. Range bound movement in oil.

Fed and other central banks are intent on taming inflation, and hence they shall keep raising rates and test waters, which in turn will trigger some volatility in the market. Having said that, we are confident that as soon as the Fed sees evidence of inflation coming under control or even cooling off a bit, they will pause the rate hikes as also the policy tightening. Once they are convinced about shifting the attention from inflation to economy once again, they shall start the regime of cutting interest rates. Somewhere in 2023, we could see the rate cut cycle back in action again. The past is replete with instances when central banks kept rates low to support growth and continued with their liberal monetary policies despite rising inflation.  

There is ample reason to trust the Fed, as also other central banks, that come what may, they would certainly not push the world economy into recession. Technically, two quarters of negative growth is classified as a recession, but beyond that, the moment central bankers see evidence of inflation cooling down, they will press the pause button for sure. Already, there have been several raised voices urging the central banks not to overdo the tightening, showing them the futility of sticking to their guns and simply raising rates in succession. We expect these voices to positively influence the central bank decisions going forward.

As mentioned earlier, when inflation was on the rise due to Covid and other issues, central bank maintained their status quo of low rates. It was only when the Ukraine–Russia war pushed inflation numbers out of control, and when inflation threatened to touch 9 ?10 percent, that they intervened with their rate hike spree.

Meanwhile, US G?Sec has also moved up in anticipation of a situational reversal. If it peaks at 4.25% and stabilizes at that level, and if Indian G?Sec also settles at ~8%, equities will witness an exciting phase for sure. As and when bond and currency markets stabilize, we shall see equity markets following suit which is when the FII selling will peak out. Dollar index on the currency side is close to its peak, and in terms of INR, inflation shall peak faster and drop faster, and would under more under control compared to USD, as is evident from our real rates which are better than US rates. Our Current Account Deficit shall obviously expand, but we feel that event is already priced in. We can expect Rupee to settle at 83?84 vs the Dollar. Given all these developments, FII selling will come to a halt, and we can expect FII inflows to resume with renewed vigour.

Amid the current chaos, we need to expect and accept volatility as an inevitable factor as any bad news in Europe or any fresh escalation in the Russia?Ukraine hostilities can throw all asset classes out of sync. Having said that, India remains structurally positive even in this gloomy situation, and fast emerging as the fastest growing market in the world. It is pertinent to note that other markets with similar profiles as India, like Indonesia and Philippines, are also witnessing downgrades.  

All in all, once a margin of safety is in place, certain pockets of opportunities will emerge and loom large. With a firm focus on these pockets of opportunities this year, we recommend our Splendid Seven Diwali Buys.


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