investment strategy: Be very cautious now, the market lacks leadership – Ajay Bagga

“I have been cautious for the last eight weeks. I would still be cautious. There is no silver lining right now. This period has to be traversed. The good thing is that in India at least the economic dynamics are good”, says a market expert. Ajay Bagga.

How would you characterize the past week? There is a feeling that the tide really seems to be turning and that this may not be a bump but a change in the whole background of the equity markets. your sight?

Nasdaq is down over 20%, so it’s clearly a market rollercoaster ride. At times, we are seeing sharp reactions on both sides, as we saw on Wednesday and Thursday in the US market. So it is a very volatile market with a much improved VIX also pointing towards high volatility. Globally, economies are slowing down. China has been an outlier. It has already shown a big slowdown in growth. The US of course is at minus 1.4% but that can be explained by the inventory build in the last quarter of last year so the US slowdown in the first quarter was not taken With so much force.

But overall, economies are slowing down and central banks have to raise rates as inflation runs red hot. We don’t have a very good scenario, in fact it’s the reverse of the Goldilocks scenario. Now we have a slowing economy and the central bank raising rates. So is it the 1970s? Are we heading towards stagflation? That is the first concern of the markets.

The second concern is that the liquidity tightening that will take place from June in the US is unprecedented. That has never been seen on this scale. If they really do proceed as they say by cutting $95 billion a month starting in September, we’re talking about trillions of dollars plus flowing out of US markets over the next 15 months. $47.5 billion in the first three months and then $95 billion. That kind of quantitative liquidity tightening has never been attempted anywhere. Of course, 2020 was unprecedented. It was easier to give money. Withdrawing that money is going to be very difficult and the markets will suffer.

I have been cautious for the last eight weeks. I would still be cautious. There is no silver lining right now. This period has to be traversed. The good thing is that in India at least the economic dynamics are good. We will probably go down from the assumed 7.2% for this year, maybe to 6.5% average growth, but we had a high valuation and therefore we are not going to see a big price increase.

We have lost seven months. If one maps the markets from 1st Oct till now, FIIs have taken out Rs 270,000 crore. The IIDs have contributed Rs 200,000 crore which helped the markets. Through April we were only down 2.5% in the last seven months but May has been pretty cruel and I would say that probably sideways markets in India and negative markets overseas are the best case scenario right now it’s time to Be very cautious in these markets.

What should be the next course of action for investors as we face acute turmoil not only in Indian markets but also in markets around the world? Do you buy again? Do you wait for the dust to settle? Are you looking for value versus growth; what is the strategy
Yes, in these pessimistic times, where the outlook is quite dark, I would say that it is better to wait. The usual investors, the SIP investors continue. But because we can’t time the market, the probability of the markets going sideways or going down is much higher. So I would be cautious. One has to be very selective. One has to look for value now. The problem with growth right now is higher rates.

Look what RBI did with the surprise rate hike. Now that they have removed the May 2020 rate cut, what about the March 2020 rate cut of 75 bps? Will it be removed in June or between June and August policy? One can see the lack of confidence in the market because until now we were saying that central banks have become very transparent. They’re telegraphing their moves well in advance. This kind of surprise rate hike was not necessary. They could have said they were going to take away the 1.15% stimulus that we gave in 2020. We’re trying to do that in the next three policies, expect that. That would have gone very well with the markets.

Now we are really trying to see what will happen with that 75 bps and the bond markets are panicking in reaction. Rs 120 lakh crore of loans in the economy have been revalued from 40 bps higher to 50 bps higher. So it is more expensive to do business. It is more expensive for households to pay higher EMI. All that has happened.

In this type of scenario, for companies to continue growing, to continue seeing consumption becomes a bit difficult and some uncertainty has entered. So you have to be very selective. Right now, leadership is lacking. Normally, in an inflationary environment, commodities, real sectors will do well. REITs, InvITs, real estate, cement, building materials, everything that can get more expensive and pass on the higher cost. The energy will tend to do well. We don’t have pure energy games in India. The best would be finances, which tend to do well as rates go up. Right now, our finances have been hit hard over the last 12 months by a very high level of FII sales. That has to slow down for our finances to really take the lead.

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