Market very fragile now, better to stay away: Ajay Bagga

“Markets are really grappling with a very hawkish Fed. While the US Fed funds rate swap market is showing a rate cut by December, the Fed officials are at pains to explain that this kind of premonition or forecasting is spoiling all our work. We are trying to tighten financial conditions and you are jumping to conclusions that there is a pivot sometime in 2023; there is no pivot coming! That is the message coming from the FOMC minutes. They put it down in writing and I think that is what is scaring the markets,” says independent market expert Ajay Bagga. Edited excerpts:


It was not a great week for the Indian markets, not a great start. But going ahead what will be the outlook given the kind of news flow that we are getting to hear especially on the inflation and the recession front?

As far as the markets go, you can see they are very fragile. The US job openings reports, jobless claims, PMI, all were pointing towards still a very tight labour market, which the Fed would not like. The FOMC minutes showed the extent of the hawkishness. In September for example, none of the 19 voting members of the FOMC had put 5% as their terminal rate. Now 17 out of 19 put 5.1% or higher as their terminal rate for this rate hike; so hawkishness has increased over the last three months and that is what is worrying the markets.

Markets are really grappling with a very hawkish Fed. While the US Fed funds rate swap market is showing a rate cut by December, the Fed officials are at pains to explain that this kind of premonition or forecasting is spoiling all our work. We are trying to tighten financial conditions and you are jumping to conclusions that there is a pivot sometime in 2023; there is no pivot coming! That is the message coming from the FOMC minutes. They put it down in writing and I think that is what is scaring the markets.

There is no chance of inflation coming to 2% within this year unless there is a huge recession, which does not look likely. Atlanta Fed GDP number for quarter four is coming at 3.9% which is not looking anywhere near a negative trend for the US economy and in that scenario, the Fed will hold its hawkish stance and that is what is troubling the markets.

Nifty IT is the space that actually has underperformed. We know that it is not doing well and now when you look at the previews coming in at least for and all, we are expecting a muted Q3. Do you think that means we could see a bit more of a downside?

Yes, definitely, we would see that and I am expecting a correction in February once the rate hike is kind of digested. The probability is shifting to a 50 bps rate hike in February instead of 25 bps. This is not good news for IT in terms of new orders because given the amount of uncertainty in the markets, and in the economy, companies will hold back on new expenditures.

We may see a bit of a slowdown for IT over next six months. So, two-quarters of more pain and then as the recession fear starts going off towards the end of the year, we could see IT coming back in favour. Markets will react three months in advance, they will give us a chance earlier but right now we are expecting lower markets going ahead.

Keeping results in view as well as the global news flow, which are some of the sectors that you should be watching out for to play on the bullish side? Any sectors that you wish to flag off?

Right now we should be careful given recession fears. My personal view is the US will escape from a recession while Europe might have a mild one. So, it is not going to be a very deep recession anywhere in the world but then again who knows? The kind of selling that has happened on the FII front this week has caught me by surprise because usually this is done by December 20th or so and books are closed for the year.

Banking, which was an outperformer and is going to get very good results this quarter, we saw selling there. GEM funds or Asia ex-Japan kind of funds are seeing some new redemption and it is not a good precursor for the markets.

The global cues are going to be more dominating as far as the market goes. We might see a rally going into the budget but there is very little expectation on the corporate front. We are expecting rural consumption to pick up based on the welfare measures being announced and more outlay coming in on the rural segments. Consumption will be a theme, and domestic cyclicals would be a theme. But the way real estate got hammered for example this week, it is just showing that the selling has been very broad-based and normally it would be exhausted by December. What we are hopeful about in the next week is that more fund managers return from their New Year holidays and new allocations come in.

So, let us wait and watch as it is a very fragile market right now. I would say it is better to stay away from the market.