Is the banking crisis averted?
If the global central banks do not act actively to improve the situation, then the latest banking sector crisis can take a very serious form. In Europe too, such a crisis was averted as Swiss regulators showed interest in lending $54 billion to Credit Suisse. Although the US regulator has made the deposits of Silicon Valley Bank and Signature Bank safe, it is now feared that the crisis may not arise in any other bank. Share prices of US regional banks have been falling steadily as investors believe that central banks will help depositors, not equity investors.
Are problems brewing for global financial markets?
The sharp rise in interest rates during the past 12 months can have unexpected consequences. Although we have now identified some problems, the momentum of the markets can be maintained. The good news is that bond yields have come down sharply and the two-year US bond yield is down from 5 to 4 percent. This indicated that the US Fed would raise rates by up to 25 basis points, compared to the 50 percent increase initially expected. There are also speculations that there will be no rate hike now. Alternatively, a decline in bond yields may signal a change in the borrowing landscape for the US economy.
Will there be a 25 basis point rate hike?
We believe the Fed will raise rates by 25 basis points and then pause depending on any further concerns. This concern can be from the financial sector. The risk associated with this strategy is that earnings could stagnate, eventually leading to a downward revision of earnings estimates.
Are valuations favorable now?
Fresh selling in the Indian market has brought valuations closer to long term averages. However in the context of emerging markets (EM), valuations remain somewhat high. We believe that the first half of 2023 could see earnings pressure due to the global slowdown, and the Indian economy will take some time to recover.
Is it a good time to focus on a select stock for the long term?
It is wise to look into cherry-picking themes that can prove to be good bets for both the short term and the long term. Themes we’re particularly loving include defense spending and investments in renewable energy, semiconductors, electronics supplies, local travel, hospitality and aviation. And given India’s strong growth, banking remains a key area for us.
What will be the road ahead for foreign capital inflows?
In the longer term, we believe that once the Fed stops rate hikes, investors will look for upside potential and EM will be among their favorite assets.
Primarily, flows in EM during the first half of the year will be concentrated towards exporting countries like China/Korea/Taiwan. However, we will draw flows given our weighting in the indices.
Many foreign investors are currently negative on India given the strong performance in 2022 and the current high valuations. Capital inflows may pick up in the second half, as economic growth picks up and earnings estimates improve.
Will local capital flows continue?
Local investors will continuously increase their exposure to equity mainly through SIP. Markets will remain strong even after the current problems. Debt schemes as an asset class are becoming more attractive due to higher returns and capital appreciation. This is where capital could come in if the Fed tightening cycle ends.
