Last month was a very volatile month for the market even inspite of the growth boosting budget and dovish RBI policy. The big stressor for the market was rising inflation in the US and the pressure on the US Fed to raise interest rates.

In the last month, all broad indices ended negative. Small Caps and Mid Caps did worse than the Large caps. Gold was the only positive in the volatile economy.

Among sectors, PSU Banks, Metals and Private Banks were the best performing sectors. On the other hand, IT was the worst sector, falling due to global cues as most of the global tech players are falling.

Among our portfolios, smallcaps and momentum were the most robust even though most of the portfolios ended negative. The innovation portfolio took the worst hit.

Key Investor Questions

Q: We are towards the end of the December quarter earnings season. How do you read quarterly earnings announced so far?

The earning cycle is in a growth and recovery path even though the rising inflation has started affecting the margins. The banking sector has posted impressive numbers, and the IT sector posted great topline numbers, but the stress from attrition and margin tightening can be seen. The manufacturing industry is stressed due to higher prices, whereas Metals and downstream Oil & Gas firms have posted good numbers. The biggest company on the index, Reliance, beat street estimates while Tata Motors' results were a mixed bag. We expect the earnings growth to keep the pace going forwards as Omicron hasn’t had too much impact, and the Budget has provided a growth push.

Q: What did you think about the RBI policy?

The RBI surprised on the Dovish side by leaving the repo and the reverse repo rates unchanged. Most economists projected that the reverse repo would be increased, and the stance would change from accommodative to neutral. Still, the governor has undoubtedly kept the outlook accommodative and supportive for growth. As a result, the bond yields have fallen, and the bond markets are rallying, leading to market profits for the banks and banking and housing finance companies. There is a cheer from the market in all quarters right now, which is a big positive, but with all major global central banks turning neutral from dovish, market participants would closely monitor this move by the RBI to see if they are falling behind the curve.

Q: Is it the right time to invest in infrastructure, construction, capital goods, banks, and realty stocks, especially after the Union Budget, wherein the Capex increased by 35 percent to Rs 7.5 lakh crore for FY23.

With Budget 22, the government has shifted focus to infrastructure growth. The FM has increased the Capex investment target by 35% to 7.5 lac crore and announced critical investments and policies for infrastructure development via railways, metro systems, highways, primarily through the PM Gati Shakti initiative. Therefore Infrastructure, Construction, Capital Goods, Cement, Banks, and Real Estate will gain if the budget planning is successfully implemented.

It is a good time to allocate to the mentioned sectors, but these sectors are tricky to time and allocate to. Therefore, it is an excellent time to add these sectors to a diversified portfolio with a 10-20% allocation for the long term.

Q: FIIs have already sold more than Rs 1.4 lakh crore worth of Indian equities since September 2021. What are the decisions by the Fed that could hamper FII flow in emerging markets, including India?

The US Fed rate hike is a big event spooking the global world everywhere. There will be a concrete direction only when the definite hike schedule is announced. There is a lot of speculation, which is causing confusion and volatility. I expect the Indian markets to be strong in the long term, especially if this budget promises we will have good growth in the next year. India is an attractive investment destination, and rate hikes are not necessarily harmful, as seen from 2004-07 and 2013-14. I expect the strength to come back as the situation clarifies itself.

Q: What do you think about US inflation? How will it affect India?

Last month, inflation in the United States was at an all-time high, with consumer prices recording their highest yearly increase in nearly four decades as prices soared across the board An increase in CPI by 7.5% was recorded for the past 12 months till January. This is the highest increase since February 1982. In comparison to December the increment was about 0.6%.

The price hikes are being attributed to a variety of variables, including the Fed's easy money measures designed to bolster the economy during the pandemic, supply chain snarls, component and labour shortages, and strong demand from American consumers.

To control inflation the markets are anticipating FED to hike interest rates a couple of times in the coming quarters. Perhaps, if this happens it is a matter of worry for the Indian markets as foreign investors would start selling. This would eventually result in a bearish trend.

Q: What are the themes that one should consider for the portfolio with a 1-2 years' perspective?

The big themes for the next 1-2 years are infrastructure growth and cyclical recovery, as the budget has clarified. Also, FM has focused on Fintech instead of Banking, Electric Vehicles, and Edtech instead of Education which has brought back focus to the new-age innovative sectors. So new economy sectors which might have reached a bottom and sustainables can be key in the next few years.

Q: Oil prices were back above $90 a barrel now, and if it hits $100 a barrel in the near term, will it dampen the market sentiment, but should one be worried due to that correction?

The Russia-Ukraine crisis has caused supply-side disruption in oil production while the demand is already too high. The crude prices could spike up to $100 a barrel, triggering inflation. The budget has assumed an oil price of 65$ in its projection, and if oil prices rise, there will be a need for government subsidies. A spike to triple-digit oil prices would be a worry in the near term.