ETMarkets Smart Talk: High inflation could put pressure on equity markets in short to medium term: Prakars – Economic Times

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“We expect the equity markets to trade with a negative bias in the short to medium term till we see any signs of inflation cooling off,” says Prakarsh Gagdani, CEO, 5paisa.com.

In an interview with ETMarkets, Gagdani said: “A strong dollar is good for IT, Pharma and export-oriented stocks that earn a higher percentage of their revenues in dollars. Every dollar earned through exports results in more rupees added to their bottom line.,” Edited excerpts:


With central banks looking at tightening the money supply – what is your view on markets in the medium to long-term?
Central Banks in most parts of the world are increasing interest rates and tightening money supply to control the rising inflation. Monetary policy tightening usually leads to lower stock prices given the higher discount rate for expected cash flows and lower future economic activity.

Thus, we expect the equity markets to trade with a negative bias in the short to medium term till we see any signs of inflation cooling off.

However, long-term investors should look to accumulate quality stocks at lower levels as the valuation has become reasonable in some pockets.

Encouraging data from MF in May and SIP flows are increased marginally which is a positive sign, but at the same time redemptions are also happening. But, do you foresee more funds getting allocated towards fixed income vs equities?
The retail inflows have increased significantly post the pandemic and a decent amount of inflows are coming through SIP mode which is being invested from a long-term perspective.

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The redemptions seen should be a temporary phase as the markets are correcting sharply. Thus, we may see a temporary shift towards fixed income funds but once the global market stabilizes, we would again see significant allocation towards equity schemes as they have historically proved to provide high returns to investors.

If someone plan to put Rs 10 lakh now – which is the ideal medium. What is the ideal asset allocation strategy?
Historically, equities have delivered a higher rate of returns amongst various asset classes over a longer period of time. Although, one should be aware that investments in equities come with more volatility in the investment portfolio.

The valuations post the recent correction have become reasonable but the near-term risks remain high due to the weak global scenario.

Thus, if one is looking to start fresh, then he/she can allocate 60% towards equities at current levels and 40% in bonds. However, if the market corrects further then a gradual increase in allocation towards equities should be done at lower levels which would be beneficial in the long term.

So, this should not be a one-time activity, but investors should review the markets from time-to-time and accordingly make necessary changes.

Do you think FDs will now become more popular at least for the risk-averse investor in light of the rising interest rate scenario?
Investors usually look for low-risk avenues when the equity markets correct. But the F.D. returns given by banks hardly beats inflation. And post-tax returns many times may even fall below the rate of inflation.

We believe that there may be some shifty toward fixed returns as the equity market is correcting, but once the market stabilizes, investors would again prefer investment in equities over F.Ds to generate higher returns.

We saw the rupee hitting a record low in June – which stocks or sectors are likely to benefit the most from the surge?
A strong dollar is good for IT, pharma, and export-oriented stocks that earn a higher percentage of their revenues in dollars. Every dollar earned through exports adds more rupees to their bottom line.

Crude oil is also hovering around $120/bbl – which might not put India in a comfortable scenario if it holds around this level. How will it impact the economy, as well as valuations?
Our country is largely dependent on imports to meet its energy requirements. So clearly the import bills will surge and it will have an impact on the country’s current account balance.

This will also lead to higher inflation and hence, hurt the economic growth. Thus, our markets will be looking for cues from Crude prices and until we see a cool-off in the same, we would continue to see a negative impact on the equity markets.

With rise in interest rates do you think it would dent valuations?
Rising interest rates will increase the cost of borrowing for the corporates. This in turn impacts their earnings and higher interest rates cause a de-rating of earnings multiple.

Yes, if inflation remains high and RBI tackles it with a sharp rise in interest rates, then it would have an impact on the equity valuations.

FII selloff in India is part of the larger global selloff. When will FIIs reverse the trend and dos that mean that FII heavy stocks where they have a double-digit stake could remain under pressure?
FII has pulled out a significant amount from our markets in the last few months. However, DIIs have absorbed most of their selling and hence, we have relatively done well in spite of their sell-off.

In the near term, the FII heavy stocks could remain under pressure due to this but given the attractive valuations in some of the pockets, the downside could be limited for them as domestic investors would take this as a good opportunity.

There are plenty of stocks trading at double-digit discounts compared to their 52-week highs. What is the right strategy to be followed when buying a falling knife?
One should not look to invest in stocks only because they have fallen significantly from their 52-week highs. Investors should look for companies with high growth potential where valuations have become reasonable.

But, one should be patient and look for a top-down approach. Once there are signs of cool-off in inflation and stability in equity markets, one should then look for investing in such opportunities.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)

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