stock market: ETMarkets Smart Talk: High inflation could put pressure on stock markets in the short to medium term: Prakarsh Gagdani

“We expect equity markets to trade with a negative bias in the near to medium term until we see signs of inflation slowing,” says Prakarsh GagdaniCEO,

In an interview with ETMarkets, Gagdani said, “A strong dollar is good for IT, pharmaceutical and export-oriented stocks that earn a higher percentage of their dollar earnings. Every dollar earned from exports translates into more rupees added to their bottom line. » Edited excerpts:

As central banks consider tightening the money supply, what is your view of the markets in the medium to long term?
Central banks in most parts of the world are raising interest rates and tightening the money supply to control rising inflation. Tighter monetary policy typically results in lower stock prices given the higher discount rate of expected cash flows and lower future economic activity.

Thus, we expect equity markets to trade with a negative bias in the short to medium term until we see signs of slowing inflation.

However, long-term investors should look to accumulate quality stocks at lower levels, as valuation has become reasonable in some pockets.

Encouraging data from MF in May and SIP flows are increasing slightly, which is a positive sign, but at the same time redemptions are also happening. But do you expect more funds to be allocated to fixed income securities relative to equities?
Retail inflows have increased significantly after the pandemic and a decent amount of inflows are going through SIP mode which is invested with a long term perspective.

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The observed buybacks should be a temporary phase as the markets correct sharply. So, we might see a temporary transition to fixed income funds, but once the global market stabilizes, we would again see a large allocation to equity funds, as they have historically proven to offer high returns to investors. .

If anyone is planning to put Rs 10 lakh now – that is the perfect way. What is the ideal asset allocation strategy?
Historically, equities have generated a higher rate of return among different asset classes over a longer period. However, one should be aware that equity investments come with greater volatility in the investment portfolio.

Valuations after the recent correction have become reasonable, but near-term risks remain elevated due to the weak global scenario.

Thus, if one is looking to start from scratch, one can allocate 60% to equities at current levels and 40% to bonds. However, if the market corrects further, a gradual increase in the equity allocation should take place at lower levels, which would be beneficial in the long term.

Thus, it should not be a one-time activity, but investors should review the markets from time to time and make necessary changes accordingly.

Do you think FDs will now become more popular, at least for the risk averse investor, in light of the rising interest rate scenario?
Investors generally look for low-risk avenues when stock markets correct. But the FD yields given by banks barely beat inflation. And after-tax returns can often even fall below the rate of inflation.

We think there could be some shift towards fixed returns as the equity market corrects, but once the market stabilizes, investors will once again prefer to invest in equities over FDs to generate higher yields.

We saw the rupiah hit a record high in June – which stocks or sectors are likely to benefit the most from the upside?
A strong dollar is good for IT, pharmaceutical, and export-focused stocks that earn a higher percentage of their dollar earnings. Every dollar earned from exports adds more rupees to their bottom line.

Crude oil is also hovering around $120/barrel – which might not put India in a comfortable scenario if it holds around that level. What will be its impact on the economy, as well as on valuations?
Our country is largely dependent on imports to meet its energy needs. It is therefore clear that import bills will explode and this will have an impact on the country’s current account balance.

It will also lead to higher inflation and therefore hurt economic growth. So our markets will be looking for crude price cues and until we see a cooling in the same, we will continue to see a negative impact on equity markets.

With rising interest rates, do you think that would lower valuations?
Rising interest rates will increase the cost of borrowing for businesses. This in turn has an impact on their income and higher interest rates lead to a devaluation of the income multiple.

Yes, if inflation remains high and RBI tackles it with a sharp hike in interest rates, it would impact equity valuations.

The sale of FII in India is part of the biggest sale in the world. When will FIIs turn the tide and does that mean heavyweight FII stocks where they have a double-digit stake could remain under pressure?
FII has withdrawn a significant amount from our markets over the past few months. However, the DIIs absorbed most of their sales and as a result we did relatively well despite their sale.

In the short term, FII heavy stocks could remain under pressure because of this, but given the attractive valuations in some pockets, the downside could be limited for them, as domestic investors seize this as a good opportunity.

Many stocks are trading at double-digit discounts from their 52-week highs. What is the right strategy to follow when buying a falling knife?
One should not seek to invest in stocks just because they have fallen significantly from their 52-week highs. Investors should look for companies with high growth potential whose valuations have become reasonable.

But, you have to be patient and look for a top-down approach. Once there are signs of slowing inflation and stable stock markets, then look to invest in such opportunities.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts belong to them. These do not represent the views of Economic Times)

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