Globally, outlook for equities is weak in the short run. Concerns about a US recession are rising. Europe is on the verge of recession and China is struggling with deepening crisis in the property market. US inflation and the Fed’s hawkish monetary stance will continue to impact global equity markets in the short-term. Inflation in US continues to remain persistently high at 8.3 percent in August and the Fed has vowed to continue raising rates till inflation comes under control. Presently, the Fed’s fund rate is 3 to 3.25 percent and they are likely to announce the fourth continuous 75 bp rate hike next month. The terminal rate in this rate hiking cycle is likely to be around 4.6 percent by March 2023.
The ultra-hawkish monetary stance of the Fed has led to sharp rise in the dollar index and bond yields in US. The dollar index which denotes the value of the dollar against a basket of six major currencies has touched a 20 year high of 114 and the 10-year US bond yield is above 3.8 percent in early October. Rising dollar and rising bond yields are driving capital flows away from other markets – developed and developing – to the US. This is impacting equity and currency markets.
Even though inflation is much lower in India compared to the developed world, the RBI is forced to raise rates to prevent capital flight. RBI has, so far, raised rates by 190 bp, taking the repo rate to 5.9 percent. The terminal rate in this rate hiking cycle is likely to be 6.5 percent by April 2023.
Rising interest rates have negative implications for growth and corporate profits. India can achieve a growth rate of 7 percent in FY23, but growth is likely to decline to around 6.2 percent in FY24. The slowing global economy and rising interest rates pose major challenges to India’s growth. Rising crude prices triggered by production cuts by OPEC+ pose another challenge.
Remain invested and continue to buy on dips
It is important to remain invested and continue investing even in this challenging environment. Successful investors never try to time the market. The secret of successful investment is to spend time in the market rather than trying to time the market. Short-term challenges may suddenly disappear, and the markets can stage surprising rallies. Only, those who remain invested will benefit from market rallies. Bulk of the market appreciation in a year may come from rallies happening in 10 to 15 days. Those who miss out on these rallies miss the entire appreciation in a year. That’s why it is hugely important to remain invested in the market. Market dips may be used to buy high quality growth stocks in segments like financials, automobiles and capital goods.
Even in this challenging environment, India has been outperforming its peers this year and this outperformance is likely to continue. India will appear expensive relative to peers going by current valuations. Nifty at 17000 is trading at above 20 times FY23 earnings. But if we look at FY 24 earnings the PE ratio comes down to around 17, which is fair. From a longer-term perspective, India with its unique growth potential is attractively valued. So, have a long-term perspective, remain invested, and continue to buy on dips.