There is a theory that when the adjustment begins in the world, it will start with the money market first, then it will come to the foreign exchange market, and then it will come to the stock market. The money market adjustment is over, the currency has already started to move and now the equity markets are going to have a sharp adjustment. Do you think that history will repeat itself and that the victim now could be equities in the second half?
When we say stocks, it’s really what benchmark we’re looking at. If you look at the kind of correction that expensive growth stocks have seen, meaning the Nasdaq from the December highs, January, that’s pretty serious. If you look at the kind of correction that China and some other markets have seen, that’s pretty serious. If you look at the last quarter and what the whole market has absorbed, a massive drop on the Nasdaq is how we start January and then we go into a war, the last quarter saw record FII sales.
In fact, at the end of March, if you can pick and choose your time horizon, three months, six months, nine months, 12 months, any three months, six months, nine months, 12 consecutive months, in known history, FII had not sold more than it had sold at the end of March. From that perspective, the market ended a bit higher, 1% higher. So, it has absorbed a lot. Basically, sector rotation is the way it has been developed.
Maybe that’s something we should take into account saying why do we say that stocks have not been reacting? If you look at some of the more expensive growth sides in the market, they have reacted quite violently.
Look at the Nasdaq and you can see where some of that reaction has occurred. It’s just that the rotation of the sector has masked it in more generic indices, be it the S&P or the Nifty.
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How much of the downgrade do you think is still left in the so-called value space? What used to be the ugly duckling, has now become a fad?
I think that has been the theme of this post-Covid market. A big part of the recovery that happened after Covid hit us was that many central banks and governments were taking action that was percolating in the belief that this would lead to a recovery of genuine economic growth. That kind of trust has been lagging for much of the past decade.
This year we are going to end up with Nifty EPS growth of almost 40%. As FY22 ended, we had high or very high EPS growth for Nifty. Many of these stocks that became more expensive at a time when economic growth or general growth did not exist have now begun to take a backseat. So what market participants have been trying to play is to take advantage of genuine economic growth to return.
So yes, the Federal Reserve is taking action, but that’s because of the kind of economic growth that we saw last year that has led to inflation. This market will start to fall more dramatically when concerns about economic growth are much higher and start to disappoint big time. That hasn’t happened yet. Only when that starts to happen will we have the next level of rotation.
When economic growth is picking up, when people talk about infrastructure spending, then it is really the old economy that is coming back and that, after years of underperformance, has been turned into value. This type of sectoral rotation has been taking place. I believe that this is not something that has ended.