It was not a good week for Indian markets, not a good start. But going forward, what will be the outlook given the kind of news feeds we’re hearing, especially on the inflation and recession front?
Regarding the markets, you can see that they are very fragile. US job openings reports, unemployment insurance claims, PMIs all pointed to a still very tight labor market, which the Fed would not like. The FOMC minutes showed the extent of the aggressiveness. In September, for example, none of the 19 voting members of the FOMC had set 5% as the terminal rate. Now, 17 out of 19 have put 5.1% or more as the final rate for this rate hike; hawkishness has therefore increased over the past three months and this is what worries the markets.
The markets are really struggling with a very hawkish Fed. With the US fed funds rate swap market showing lower rates through December, Fed officials are struggling to explain that this kind of premonition or forecast spoils all of our work. We try to tighten financial conditions and you jump to conclusions that there is a pivot in 2023; there is no pivot coming! This is the message from the FOMC minutes. They put it in writing and I think that’s what scares the markets.
There is no chance of inflation hitting 2% this year unless there is a huge recession, which seems unlikely. The Atlanta Fed’s GDP figure for the fourth quarter comes in at 3.9%, which does not seem anywhere near a negative trend for the US economy and in this scenario the Fed will maintain its hawkish stance and that is what worries the markets.
Nifty IT is the space that actually underperformed. We know it’s not going well and now when you look at the previews coming in at least for everything, we’re expecting a muted Q3. Do you think that means we might see a little more downside?
Yes, definitely, we would see that and I expect a correction in February once the rate hike is somehow digested. The probability is shifting towards a rate hike of 50 bps in February instead of 25 bps. This is not good news for IT in terms of new orders, as given the uncertainty in the markets and in the economy, companies will hold back on new spending.
We could see a slight slowdown for IT over the next six months. So two quarters more pain and as the fear of recession starts to fade towards the end of the year, we could see IT come back into favor. The markets will react three months in advance, they will give us a chance earlier, but at the moment we expect the markets to fall.
Keeping in mind the results as well as the global news feed, what are some of the sectors you should watch to play on the bullish side? Sectors you want to report?
Right now, we need to be cautious given recession fears. My personal view is that the United States will escape a recession while Europe may experience a mild one. So it won’t be a very deep recession anywhere in the world, but again, who knows? The kind of selling that happened on the FII front this week took me by surprise, as it usually happens around December 20th or so and the books are closed for the year.
The bank, which has outperformed and is going to do very well this quarter, we saw selling there. GEM funds or Asia ex-Japan type funds are seeing new redemptions and this is not a good precursor for the markets.
Global indices are going to be more dominant as far as the market is concerned. We might see a rally come into the budget, but there is very little expectation on the corporate front. We expect rural consumption to pick up based on announced social measures and additional spending on rural segments. Consumer will be a theme, and domestic cyclicals will be a theme. But the way real estate has been hammered for example this week, it just shows that selling has been very wide and would normally be sold out by December. What we’re hoping for over the next week is that more fund managers return from their New Years holidays and new allocations arrive.
So let’s wait and watch because it’s a very fragile market right now. I would say it is better to stay away from the market.