“In a month or two, we might reach peak inflation for this cycle. Dollar hit 105 plus and came back down. It is strong. Maybe it has hit its peak and then peak interest rates will be very critical. Once we see that the Fed is done and we are near 3%, the whole market complexion might change,” says market expert Ajay Bagga.
The only silver lining is that crude has cooled off finally, I do not know how sustainable this is going to be but we are at $110 a barrel in Brent and Nymex as well is seeing a bit of a crack at $104 levels. However, that did not seem to rub off on equity markets today as a sentiment puller.
Markets are really alternating between fear of recession and fear of inflation. So, we are seeing alternative bouts and today clearly recession has taken over. It is in the global markets and not so much to do with local markets. It is flow linked and sentiment linked. Valuations have been contracting right now and the next leg down starts after this quarter’s earnings come through and management guidance starts.
The next leg down will come as earnings start to contract as the margins come under pressure or the top lines get clouded by a recession fear of next year. We are probably three to six months away from finding a durable bottom for this market.
One big factor is the US mid-term election year. Normally, the markets tend to bottom out around August-September and we see a good rally going into the year end in the mid-term years for the US markets and that should help us. What will really work out for us is to wait for July-August and let the central bank actions happen.
RBI also meets on August 4. It will probably be forced to raise rates by 50 bps on the August 2-4 meeting. Let us wait that out and hopefully by September-October, we will start seeing these markets bottom out. The good part will be if the supply chain issues start getting worked out and we see lesser demand with the higher rates and the Fed does not need to go through with its entire rate hike programme, that would be good and that could rally the markets October onwards.
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Right now, 80% of central banks around the world are hiking rates and withdrawing liquidity. That kind of environment is not good for equities. Where will it bottom? I do not think we have come anywhere near the peak for interest rates, inflation or dollar but we are probably at 75% to 80%. In a month or two, we might reach peak inflation for this cycle. Dollar hit 105 plus and came back down. It is strong. Maybe it has hit its peak and then peak interest rates will be very critical. Once we see that the Fed is done and we are near 3%, the whole market complexion might change. Where are you on the entire ethanol play story? This is a story which has long played out for a good two years. These stocks have gotten into consolidation and began cracking as well with the rest of the market. But what do you do with sugar plays like Praj?
For me everything is a no-go zone right now. Overall, the ethanol play is a strong story. It is a good import substitution story. It will only grow and we do not have the capacity to fulfill the demand. So, both the suppliers of the machinery like Praj as well as ethanol makers, the sugar companies will do well. But as usual the market has run much ahead of itself. It is very important to see how much they execute.
Second, it is a very politically influenced sector. One year, we have an export quota. The next year, the export quota is cut down. The bureaucrats are not bothered about inventory losses or the cost of carry or how do you pay the farmers. The politicians are concerned that you pay the farmers on time and it ends with that.
So it is very difficult. One has to play it like a commodity play only and right now it is not in a good spot. The future is bright for the good executors. You have to be very careful of the companies which have high levels of debt. We have seen that despite all the stories, nothing has much come out of it unless some MNC or some strong hand takes over and turns around. Otherwise, on their own we have not seen. There are quite a few of these very good companies, especially the south-based companies, which are run very tightly but there is too much uncertainty. Also, a lot is in the price already. So again, a no-go zone for the next three months at least.
Any niche segment ideas within the textile or fertiliser space? Any stocks that could benefit from the agri monsoon theme?
Fertilisers have been a mixed bag. It is very difficult to make a fundamental move on them. The global prices were up. If you look at the year-on-year growth, just now the May numbers from the government’s economic data points came out and the fertiliser offtake has been really very low, compared to last March and last April.
So one is wondering what is happening with the higher input costs and what exactly is happening. I would say wait, but fertilisers look in a good spot. Overall they will be beneficiaries as the government’s focus will increase on agriculture. We are seeing very targeted subsidies, working capitals have been streamlined a lot thanks to all the direct benefit transfers kind of schemes that the government has brought out. So the time for their compensation from the government has gone down.
Overall, we are not seeing the demand going up so that is the worrisome point. We can wait for this quarter’s numbers, we will get some clarity and some management guidance then you can look at it not right now so maybe wait a month for the numbers to come out.