Further rate hikes may lead to volatility/consolidation
New Delhi: After LIC’s highly anticipated bearish listing on national stock exchanges, companies may wait for stock markets to stabilize in terms of volatility and put their IPO plan on hold for some time, says Motilal Oswal Financial Services’ Head, Equity Strategy – Brokerage and Distribution, Hemang Jani.
He also cited the importance of global signals and developments, particularly in the US, on investor sentiment.
After reviewing LIC’s performance, many market participants believe that the IPO craze seems to have died down for now.
Companies like NSE, Byju’s, Snapdeal, Ola, Oyo, Pharmeasy, Bajaj Energy, Go Airlines, MobiKwik are expected to come out with IPOs in 2022.
Companies with differentiated and niche business models continue to see good demand regardless of market conditions, Jani told IANS, adding that, however, developers and investment bankers can now consider pricing more reasonable in their IPO offerings, which may provide an advantage for retail investors. Extracts…
Given the current high volatility in equity markets, what do you think of the behavior of FIIs/REITs with regard to their investments in India?
FII has been selling continuously since October 2021. They have sold nearly Rs 3.23 million lakh worth of shares since then. In anticipation of US Fed rate hikes and bond cuts (reducing excess liquidity in the system), foreign institutional investors (FIIs) began to sell emerging market stocks. in India.
On the other hand, Domestic Institutional Investors (DIIs) have supported the markets as they have been net buyers on a monthly basis since April 2021. They have bought 2.96 lakh crore worth of shares since April 2021. This is mainly due to the increased participation of individuals in India through mutual funds.
Do you think the stock market has already bottomed out, or is there a chance of a major correction in the near term?
Stock markets around the world have corrected over the past 6-8 months. The US, European and Indian indices fell 7-15% from their respective highs. Rising inflation and interest rates across the world, high crude and other commodity prices, multi-year high dollar index, weak corporate earnings and disruptions in the supply chain due to blockages are a few factors causing a correction in global markets. The Fed and RBI would raise interest rates further to curb inflation.
The markets have, to some extent, anticipated a further 50 basis point rate hike by the US Fed at upcoming meetings. This may lead to more equity market volatility/consolidation, but we don’t expect a very steep drop from current market levels.
Any new unfavorable geopolitics around the world can lead to further disappointment in stock markets. A major correction from here can only happen if the US slips into a recession.
In such a volatile situation, what are safe assets to cover one’s portfolio, especially for retail investors with shallow pockets?
In volatile markets, it is best to have cash in the portfolio which acts as the safest haven. Depending on the size of the portfolio and the risk appetite of the individual, it is advisable to have a cash component of 10-25% in the portfolio. One can deploy liquidity at lower levels once the market has stabilized.
Your short and medium term outlook for LIC?
LIC’s IPO was offered at an attractive price of 1.1x 1HFY22 EV, which represented a significant discount to its listed peers. However, given weak market sentiment, its share price has been lackluster since listing.
The pandemic has impacted the insurance industry over the past 2 years, resulting in lower revenues. While the numbers for some private players have started to improve, we’d like to wait for its performance over the next few quarters before forming an opinion. In addition, the stock price movement would also depend on the government’s plan to dilute its stake in the future.
How will commodity-driven inflation affect investor sentiment? Looking at the latest government measures, how long, if at all, will it take for the CPI to return to the RBI tolerance range of 2-6%?
Historically, we have seen that with rising inflation and rising interest rates, stock markets tend to pause over a short to medium term period. Some correction is seen in equities as selling intensifies in rate-sensitive sectors like metals, real estate, commodities, etc.
This usually leads to some disappointment with investor sentiment over the short to medium term as it becomes difficult to make money in these volatile times.
The RBI has taken steps to curb inflation by raising interest rates. In addition, the government has taken several measures to curb inflation by increasing export duties on steel and iron products, restricting sugar and wheat exports to cool food prices. This would certainly help cool inflation over the next two months. Moreover, a normal monsoon should be very helpful in cooling food inflation in the future.
With foreign exchange reserves depleted, how difficult it would be for the RBI to defend a sharp or galloping depreciation of the rupee. What other ammunition is available from the central bank? What is your support and resistance for the rupee in the coming month?
The US dollar hit an all-time high of 77.9 against the Indian rupee this month. If the US Dollar moves above 77.9, then it would be a fresh breakout that could move towards the 78.5 levels and lead to more equity selling. Over the next month, the Rupee’s support is placed at around 76.8 levels and resistance at around 78.5 levels.