With May inflation in the US at 8.6% versus expectations of 8.3%, the Fed is expected to revise its rate hike forecast by 50 basis points. The market is now bracing for a 75 basis point rate hike from the US central bank. Current trends indicate that the Fed will have to continue its aggressive tightening, bringing the final federal funds rate to 3.5 or 3.75% by mid-2023.
Will aggressive tightening push the US into recession?
The likelihood of an aggressive Fed pushing the US economy into recession has risen to around 60%. The US economy is strong now and the labor market is tight; but a 3.5% terminal rate has the potential to push the US economy into recession, impacting global economic growth. Markets have yet to price in a full-scale US recession and its impact on corporate earnings. So, unless inflation shows signs of peaking and then declining, downtrends could persist.
REITs will continue to sell in India
The sale of REITs which began last October, has accelerated in 2022, and is high and
now. REITs have already sold shares worth Rs 1.91,000 cr in 2022 until June 13. With the dollar index above 103 and the US 10-year yield at 3.36%, the global macroeconomic construction is ripe for further REIT selling. This is the major brake on the Indian market.
“ Back to recommendation stories
It’s important to appreciate that REITs are selling in India, not because they’re India negative, but India is one of the few emerging markets where they’re sitting on good earnings and valuations in India are now even much higher than those in emerging markets. peers. They have sold aggressively in the financials and IT sectors, as these are the segments in which they sit on earnings.
Opportunity in times of crisis
The sale of REITs has opened up opportunities for domestic investors in certain segments. With Nifty at 16,000 trading at over 18x FY23 earnings, the overall market is still expensive, relative to the long-term PE of 16. But there are segments of the market that are attractive and buyable. now.
Financials, especially large banks, top the list. Valuations of major private sector banks are depressed, not because of concerns about their fundamentals, but because of the relentless selling of REITs. Indeed, the fundamentals of this segment have improved and are still improving. India’s industrial production, as measured by the IIP, improved to 7.1% in April, indicating a robust economic recovery. This bodes well for the banking sector which is now in good shape with falling provisions, falling NPAs and rising credit demand.
The interest rate hike scenario is another tailwind for banks as it will increase bank margins, helped by deposit rates lower than lending rates. In short, major financials, especially large private players, are good buys in the medium to long term. For investors with an investment horizon of one to two years, this is a good low-risk investment opportunity.
FMCGs and pharmaceuticals are relatively safe in turbulent markets. High-quality names in this segment have held up well even during recent steep market declines. This segment has the potential to outperform during a sell-off in the global market.
IT can bounce back
IT has corrected significantly with the IT index down 22% over the past 6 months. IT companies’ backlog remains strong and earnings visibility is good; but the market is worried about a possible US recession which would impact technology spending in the US and, therefore, Indian IT’s earnings potential. Investors can wait for FY23 first quarter results for more clarity on this.
In short, even though there is a high level of uncertainty and equity is troubled, there are opportunities for smart investors to catch big fish.