Good chance that foreign money returns around Diwali: Rahul Arora

The biggest silver lining is that the markets always climb the wall of worry and find ways to make new highs, said Arora

It has been a few tumultuous months for global financial markets as they come to terms with central banks’ action to tame galloping inflation. Still, RAHUL ARORA, chief executive officer for institutional equities at Nirmal Bang, is hopeful and tells Puneet Wadhwa in an interview that the markets always manage to climb the wall of worry and find ways to make new highs. Edited excerpts:

Have the financial markets fully factored in the likely global central banks’ action over the next few months?

To a large extent global central banks’ movements have been priced in to a reasonable extent and that is reflected in bond yields, too. The silver lining, if any, is that these rate hikes are being front-loaded and we should see most of them behind us in the next three-four months. While their effects will be felt with a lag, equity market valuations, to a large extent, factor this in.

Is there any silver lining for global equity markets amid all this gloom and doom?

The biggest silver lining is that the markets always climb the wall of worry and find ways to make new highs. This has happened after every crisis or war. The biggest economic threat to the world now is inflation and interest rates -- that devil is known; the war is known; the economic impact to a large extent is measured. Given most central bank projections, inflation, though high, will be on a declining trend as the year wears on. The pessimism is justified and the market fall is justified, but it seems like a lot of it is in the price.

By when do you see foreign money chasing emerging markets, especially Indian equities?

There is a good chance of foreign money coming back into the Indian market around Diwali this year. A sharp deceleration in growth, coupled with high inflation and its resultant impact on corporate earnings, remains the single biggest risk to the Indian markets. A good monsoon, as predicted, and the build-up to the 2024 elections -- which should see increased government spending — could spur demand in the economy and could be positive triggers for the markets and flows.

How long do you see domestic institutions (DIIs) and retail investors keep their spirits up?

DIIs, especially retail investors, have been shock-absorbers for the Indian markets this time around. Had they not been there, amid the kind of FII selling we’ve seen, the Nifty50 easily could have been around 12,500 levels. But the disciplined approach to investing via systematic investment plans (SIPs) has shown the coming of age of the Indian retail investor. Of course, confidence to some extent would be shaken, especially given the fall in new generation stocks, which were listed with much fanfare. Still, the spirit seems to be intact.

Are the markets prepared for worsening macros – high inflation, rupee depreciation, widening fiscal and current account deficit (CAD), and rising Covid cases?

Again, here I think, the news is known. There is nothing unknown. The rupee has already breached 78 to the dollar but I don’t think the Reserve Bank of India (RBI) will want it to be in continuous depreciation and step in whenever needed. On current evidence, we see no reason to rework our recently put targets on CAD, inflation, and fiscal deficit. Of course, a lot depends on the extent of government spending in the run-up to the general elections and how the government manages its borrowing programme. But as things stand, I do not think the market is factoring in a material deterioration from here.

What has been your investment strategy against the backdrop of rising interest rates and surging inflation?

Sectors that have seen time-wise and price correction in the last couple of years can make a comeback in a material way; sectors, such as banking, fast-moving consumer goods (FMCG), and of late chemicals, have seen a reasonable correction. The entire rural theme will be a good play in the run-up to elections. Dark horses can be information technology (IT) and cement.

Borrowing is becoming costlier. To what extent will all this dent demand and impact corporate earnings?

While earnings have been cut on a case-to-case basis, depending on the impact of inflation or rising interest rates, what is interesting to note is that on the consumer discretionary side, there has not been too much of a volume impact as seen in quick-service restaurants (QSR), multiplex, select paint companies, etc. On average, we have cut earnings outlooks for the affected sectors between 5 and 20 per cent, but we do believe that corresponding stock prices are capturing these cuts.