Rising rates, falling interest; how to invest in a volatile market?

How to create a portfolio to deal with rising interest rates? ASK Investment Managers’ Prateek Agrawal explains

The Reserve Bank of India (RBI) has raised the repo rate by 90 basis points in the last two monetary policy meetings to control soaring inflation, which is also one of the major concerns for the Indian stock market. Given the current volatility on Dalal Street, Prateek Agrawal, Business Head and CIO, ASK Investment Managers shared their views with Business Today on the right investment strategy amid rising and falling interest rates stock markets. He also explained how investors can increase their chances of winning in the stock market. Extracts.

Business Today (BT): How do you see rate-sensitive sectors in the context of expectations of further rate hikes by RBI at upcoming MPC meetings?

Prateek Agrawal: If interest rates rise, the impact would be negative on interest rate sensitive sectors such as real estate and automotive. Banks would benefit from the margin on higher net interest margins (NIM) while cash would take a one-time hit. General insurance companies that make profits through investment gains would experience some stress.

That said, some of these spaces are currently tackling other issues. For example, automobiles (cars) are tackling the supply chain problem and have long lead times. If the supply problems are taken care of, their positive impact would cancel out the negative impact of the rise in interest rates.

Higher profits in agriculture should be expected to increase rural incomes more than increased interest charges. In urban India, spaces that are enjoying wage increases in the current period are also expected to do well. In this scenario, although higher interest rates are negative, the other factors must also be taken into account.

BT: The benchmark BSE Sensex stock index fell 5% in 2022 through June 10. By when do you think the bulls will regain control of D-Street?

Agraal: Inflation and the policy response to inflation is a big cause for concern in the market. Inflation is forcing central bankers to tighten monetary policy faster than otherwise, which has implications for asset prices.

However, inflation would peak at some point unless fuel and agricultural commodity prices continue to rise. At the same prices next year, inflation would be zero and we have to appreciate that. If the two main causes of inflation, i.e. rising fuel prices and supply chain disruptions, subside, the outlook may shift sharply to the positive. The settlement of the Russian-Ukrainian situation may lead to a sharp drop in fuel prices as sanctions ease.

The uncertainty about the timelines of the stress period is what the market is digesting. Our country is well positioned to withstand shorter periods of stress. The government is trying to shield the people from inflationary stress to some extent. However, the lengthening of the stress period would mean a higher transmission and therefore a greater impact on businesses.

It is to be expected that a sharp tightening of monetary policy will hurt the markets because it would be perceived as having a negative impact on growth. We have not seen the excesses the West has had in response to Covid and so our normalization process should also lag considerably behind the West.

Apart from fuel, which has a negative impact on us, the rise in the prices of agricultural products and metals has had a positive impact on us. An improvement in purchasing power in the hinterland is to be expected as a result, which should contribute to business dynamism. The fact that employees are getting good pay rises in many sectors would also help consumer demand to remain relatively stronger than otherwise.

Valuations are now below 5-year averages and show upside potential in line with earnings growth. The great uncertainty is the period of stress. If the period of stress lengthens, companies, earnings prospects, valuations and the level of the market would suffer damage.

BT: Where do you see buying opportunities in this market? And how can investors increase the success rate in volatile markets?

Agraal: Buying opportunities presented themselves. Among lenders, for example, stock prices have in many cases fallen below long-term averages, while earnings prospects have improved with easing balance sheet stress and better net interest margins. (NIMS). Similarly, the world of specialty chemicals is experiencing strong growth and offers an interesting opportunity. Users of commodities with pricing power, such as consumer durables and commodities, are hurt by the current high input price inflation, but would benefit when inflation peaks. Consumers are the counter-actors of the market.

In times of volatility, it is essential to focus on wealthy companies with strong capitalization capacity to improve the chances of long-term success.

BT: What impact could the rising cost of money have on mid and small caps?

Agraal: In times of sustained market volatility, mid and small caps are considered underperformers. They can resist better in the initial phase but if the selling pressure continues, they fall more. This space is less liquid and the impact cost is higher. The same phenomenon can also be observed on the rise during more favorable periods.

An increase in the cost of silver in various ways puts pressure on valuations, as does a lower availability of silver. Central banks around the world are tightening and some correction in asset prices is to be expected.

However, a lot is in favor of midcaps at this point. If we look at investment themes such as broadening the base of global supply chains, formalizing the economy, offshoring, beneficiaries of the Production Incentive Program (PLI) initiative government and home improvement, most of the recipients are mid-cap companies. . Some of the themes have strengthened over this period. Doing more locally, with a greater focus on domestic manufacturing of new age defense equipment and diversifying global supply chains, one should expect to see stronger and sustained concentration in the future and the current market weakness provides a good opportunity to understand and assess these spaces better.

BT: Share some advice on creating a new portfolio for investors who stay away?

Agraal: Overall, if the risk the investor is willing to accept does not change much, then in times of volatility and greater uncertainty, investors should focus on more stable, high-quality companies with good prospects for growth. long-term growth. Retail-focused financial services, high-brand-power consumers, specialty chemical and API companies, and hospital chains could do well. In the past, similar periods had seen the automobile and the computer do well. In this period, automobiles have to solve supply problems. IT services have seen a sharp drop in valuations which have now moved closer to long-term averages and could be a space to come up with some good ideas.

BT: What is your advice to investors whose portfolios have fallen more than 10% during the ongoing correction?

Agraal: Market weakness is the best time when business weakness/strength comes to the fore. If the company owned by the investor is of good quality and continues to do well, a decline in the stock price should be seen as a godsend for more accumulation. However, if certain weaknesses of the acquired company are highlighted, the investor must make a more difficult decision.

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