A very important event is preparing next week in front of which the American markets and especially the riskiest assets are showing a little caution. We are seeing a rise in bond yields, how do you think the markets will react?
Overall, we’ve had a good run since mid-June, but the markets looked a bit overbought, both in India and the US. So we expected some steam to come out of the market, but what is worrying is that the dollar is appreciating again.
All other currencies depreciate against the dollar. Normally, it is negatively correlated to emerging market flows, so overall it’s a red herring.
Second, the Fed minutes showed that Fed policymakers remained quite concerned about inflation, and comments after Chairman Powell’s press conference were more hawkish. They talked about all it takes to bring inflation down and the market seems to be prematurely rejoicing because going from 9.1 to 8.5 was pretty good, but 8.5 is way above target 2% from the US Fed.
Third, China’s slowdown and retail numbers were lower than estimated and manufacturing numbers were very slow. This is a leading indicator of the evolution of demand in the world. Of course, we know that in the US, retailers had been overstocking in anticipation of supply chain disruptions and the last quarter was more about building that inventory.
The drop in oil was a big boost for the markets. Overall, more good news is that the Atlanta Fed’s projection for the US for the third quarter now stands at 2.5% annual GDP growth. Thus, after two quarters of negative results, we are going to see a fairly solid quarter for the American economy which gives substance to the markets.
All in all, I would say a mixed market got a bit ahead of itself. I would still say that we haven’t hit bottom in the market and will probably get back to it in September-October.
I wanted to know more about the metals sector in particular, we have already seen some sort of correction happening in these meters. Where do you see the metal business going from here?
The whole driver of the metals sector will largely be Chinese demand and right now we have seen the correction happening on weaker Chinese demand in the first six months of this year. We expect some sort of recovery. They have made two rate cuts this year, but that is still not enough.
Infrastructure spending is increasing, but right now they have a power problem where power is being diverted to consumers rather than industries.
Energy costs have increased almost 10 times over the past year, so Indian metal producers have a chance in export markets, but the government has levied export duties, which which limits them. We must therefore be careful with metals.
Overall on a fundamental basis. metals are a buy, but right now, due to the Chinese slowdown, our metals group will suffer for at least the next few weeks unless a Chinese stimulus is announced before October. So I expect something before October, let’s see if that happens.
Looks like in the coming week, consolidation will also be the name of the game. What type of stocks or what type of sectors would you prefer investors to watch?
Again, valuations have advanced, so I see maybe a few weeks of a slight correction unless something drastic happens in the US.
Overall, the strength of the dollar is not very good for emerging market flows and the sharp rise in the dollar index from 105 to 107 is powerful for some concerns. In terms of sectors, I would say stick to the quality names in each sector. We would prefer banks first and within that the top 4-5 private sector banks.
Automobiles should continue to perform well. In the scenario we normally go through, we would go from cyclical to defensive, but I’m not very convinced on the pharma pack in India and FMCG has margin issues, so I’d say banks offer the best space right now.
Reverse computing can be chosen because computing demand continues and we don’t see the collapse in demand that was happening. More than a year of underperformance and some under-ownership IT has become attractive.
So I would say banking and IT would be two ways to play in this market, but I would be very cautious for the next two weeks at least until we get some good signals.
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