Be very cautious now, market lacks leadership: Ajay Bagga

How would you characterise the week gone by? There is a sense that the tide really seems to be turning and that this may not be a speed bump but rather changing the entire undertone of the equity markets. Your view?

Nasdaq has lost more than 20% and so quite clearly it is a rollercoaster of a market. At times, we are seeing sharp reactions on both sides as we saw on Wednesday and Thursday in the US market. So it is a very volatile market with a very enhanced VIX also which is pointing towards a huge amount of volatility. Globally, the economies are slowing down. China has been an outlier. It has already shown a lot of slowing of growth. The US, of course, is at minus 1.4% but that can be explained away by the inventory build up in the last quarter of last year and so the US slowdown in the first quarter was not taken that strongly.

But overall, economies are slowing and central banks have to raise rates given that inflation is raging. We do not have a very good scenario, in fact it is the reverse of the Goldilocks scenario. Now we have a slowing economy and the central bank raising rates. So is it the 1970s? Are we heading towards stagflation? That is the first worry for the markets.

The second worry is the liquidity tightening that will come starting June in the US, is unprecedented. That has never been seen at this scale. If they really proceed as they are saying by reducing $95 billion a month from September onwards, we are talking of trillion dollars plus getting out of the US markets over the next 15 months. $47.5 billion in the first three months and then $95 billion. That kind of quantitative liquidity tightening has not been attempted anywhere ever. Of course, 2020 was unprecedented. It was easier to give out money. Taking that money back is going to be very difficult and the markets will go through pain.

I have been cautious for the last eight weeks. I would still remain cautious. There is no silver lining right now. This period has to be gone through. The good thing is in India at least the economic dynamics are good. We will probably go down from the 7.2% assumed rate for this year maybe to the mid 6.5% growth but we were at a high valuation and so we are not going to see much price increase.

We have lost seven months. If one maps the markets from October 1 to now, Rs 270,000 crore have been taken out by FIIs. DIIs have brought in Rs 200,000 crore that helped the markets. Up till April, we were only down about 2.5% in the last seven months, but May has been quite cruel and I would say probably sideways markets in India and negative markets abroad is the best case scenario right now, time to be very cautious in these markets.

What should be the next course of action for investors as we are staring at an acute choppiness not only in Indian markets but also markets across the globe. Do you buy afresh? Do you wait for the dust to settle? Are you looking for value versus growth; what is the strategy?
Yes in these times of pessimism, where the outlook is quite dark I would say it is better to wait. Regular investors, SIP investors continue. But because we cannot time the market, the probability of markets being sideways or going down is much higher. So I would be cautious. One has to be very selective. One has to go for value now. The issue with growth right now is the higher rates.

Look at what RBI did with the surprise rate hike. Now they have taken away the May 2020 rate cut, what about the March 2020 rate cut of 75 bps? Will it be taken away in June or between June and the August policy? One can see the lack of confidence in the market because till now, we were saying central banks have become very transparent. They are telegraphing their moves well in advance. This kind of a surprise rate hike was not needed. They could have said that they were going to take away the 1.15% stimulus that we gave in 2020. We are trying to do it over the next three policies, please expect that. That would have gone down very well with the markets.

Now we are really trying to see what will happen to that 75 bps and the bond markets are panicking as a reaction. Rs 120 lakh crore of loans in the economy have got repriced at 40 bps higher to 50 bps higher. So it is costlier to do business. It is costlier for households to pay higher EMIs. All that has happened.

In that kind of scenario, for companies to keep growing, to keep seeing consumption becomes a little bit difficult and some uncertainty has come in. So one has to be very selective. Right now, the leadership is lacking. Normally in an inflationary environment, commodities, real sectors will do well. The REITs, the InvITs, the real estate, the cement, building materials all that can get costlier and pass on the higher cost. Energy will tend to do well. We do not have pure energy plays in India. The best would be financials which tend to do well as the rates go high. Right now our financials have been hit very badly over the last 12 months by a very high level of FII selling. That has to abate for our financials to really take the leadership.