Markets may have discounted one more Fed hike; El Nino a potential risk: G. Pradeepkumar of Union AMC

G. Pradeepkumar, CEO of Union Asset Management Company believes even if the Fed does proceed with one more rate hike as anticipated, the market has probably priced this in as it is evident from the movement of the US 10-year G-Sec yield, which has moved up from approximately 3.33 per cent to around 3.8 per cent. 

In an interview with Mint, Pradeepkumar said the recent decrease in CPI, core CPI and WPI indicates that inflation drivers have weakened. However, the risks posed by monsoon and external factors should not be overlooked.

Edited excerpts:

What is your view on the market? When do you expect the Nifty to touch the 19,000 mark?

At Union Mutual Fund, we follow the fair value approach to valuation. We have our internal estimates for determining the fair value of companies within our fund house universe and the constituents of the Nifty50. 

While it is difficult to predict specific outcomes, based on our internal research, we hold a cautiously positive stance on the equity markets, particularly from a medium-to-long-term perspective spanning over three-to-five years.

In the near future, we expect the equity markets to benefit from several significant developments. 

These include the government's dedicated efforts to stimulate the manufacturing ecosystem, the potential resurgence of the rural economy, and the optimistic business outlook of corporate India. 

These factors are likely to exert a positive influence on the equity markets.

However, it is essential to acknowledge the inherent complexity of market movements, which can be influenced by a multitude of factors, such as global economic and political developments and other unforeseen circumstances. 

Therefore, it is crucial to maintain a comprehensive understanding of these factors and exercise caution while analyzing market trends.

Regarding Nifty touching the 19,000 mark, it would be speculative to provide a specific timeframe. 

The achievement of such a milestone depends on many factors, making it challenging to pinpoint an exact timeline. 

Instead, we focus on comprehensive research, careful analysis and a long-term perspective when evaluating market trends and potential outcomes.

Do you think there could be a pause in Fed rate hikes from June? Has the market factored in this possibility?

As of today, based on various data points and opinions in the market, there is a split view regarding the possibility of a pause in Federal Reserve (Fed) rate hikes from June, where some market participants believe that the US Fed may raise rates by 25 basis points one more time, while the others anticipate that the Fed will maintain the current rates. 

More data points and insights after the Federal Reserve's meeting scheduled for June 13 and 14 may help us gain further clarity. 

However, even if the Fed does proceed with one more rate hike as anticipated, the market has probably priced this in. 

This is evident from the movement of the US 10-year Government Securities (G-Sec) yield, which has moved up from approximately 3.33 per cent to around 3.8 per cent. 

Therefore, the likelihood of further short-term increases in yield does not seem to be a major concern, as the medium-term trajectory is expected to be downward.

Market sentiment is improving but we are not out of the woods yet. How should investors invest in times of uncertainty?

Although the market sentiment is showing signs of improvement, it is crucial to acknowledge that uncertainties still exist. 

As mentioned above, we are cautiously positive on the equity markets from a medium-to-long-term horizon. 

Attempting to time the market based on valuation levels can be challenging due to the volatile nature of markets. 

Instead, we believe that time in the market is more important than trying to time it perfectly.

To mitigate the effects of market volatility, we recommend two key strategies. First, consider increasing your investment time horizon, preferably beyond five years. 

This longer-term perspective allows for potential market fluctuations to even out over time, reducing the impact of short-term volatility. Second, it is advisable to participate in the market in a staggered manner. 

This means investing incrementally over time. This approach helps to mitigate the risk of making significant investments during periods of market uncertainty.

In addition, we emphasise the importance of goal-based planning for successful investing. 

This involves carefully considering asset allocation based on your risk appetite and specific investment goals. 

We strongly encourage investors to seek guidance from an advisor to build wealth and effectively achieve their long-term objectives.

What are your views on Q4FY23 earnings? Where can we see the upgrades and downgrades?

Based on the earnings report of over 90 per cent of the companies in the BSE 500 index, we see that the Q4FY23 earnings for most companies appear to be promising. 

These results are particularly encouraging for sectors such as telecom, consumer retail, logistics, and new-age companies. 

Food-related fast-moving consumer goods (FMCG) companies have been able to pass on the benefits of input costs to their customers, resulting in favourable outcomes. 

Notably, sectors like automobile, auto ancillaries and cement have experienced robust volume growth. 

Capital goods companies have reported record-high order books and banks seem to have witnessed a significant revival in overall credit growth, indicating positive growth prospects for the financial sector. 

While the chemical sector has faced some pressure, mainly due to channel inventory issues, our overall outlook remains optimistic for the long term.

What sectors are you positive about for the next one year?

We focus on sectors that rely on local factors and recognise that it is challenging to predict short-term sector performance. 

However, we hold a cautiously optimistic view of India's equity markets for the medium-to-long term. 

India's economy is expected to be the 17 fastest-growing worldwide, and for this growth to continue, a robust financial system is necessary. 

We believe that leading banking and non-banking financial institutions, with stronger balance sheets and adequate capitalization, are well-positioned to fund India's economic growth and profit from it.

Private consumption is expected to drive this growth, with an anticipated nominal GDP growth rate of 10 per cent to 11 per cent and a population growth rate of approximately one per cent. 

As a result, we anticipate an annual increase in per capita income for the average Indian of nine per cent to 10 per cent, leading to increased spending in consumer discretionary areas. Therefore, we are bullish on the consumer discretionary sector.

The Indian government is committed to transforming the country into a global manufacturing powerhouse through targeted measures, such as production-linked incentives (PLI) to encourage domestic manufacturing activities. 

As India integrates into the global supply chain and establishes itself as a manufacturing hub, we predict that the manufacturing and industrial sectors may become prominent investment sectors.

Lastly, India's robust economic growth necessitates investments in both public and private infrastructure, leading us to be bullish on the industrial space.

Inflation has eased but the sticky core inflation remains a concern. Is the risk of El Nino a potential threat which could prolong our fight against inflation?

The recent decrease in Consumer Price Index (CPI), core CPI and Wholesale Price Index (WPI) indicates that inflation drivers have weakened. However, the risks posed by monsoon and external factors should not be overlooked.

Regarding the EL Nino effect, Indian Meteorological Department’s (IMD’s) forecast differs slightly from that of private forecasters. 

Based on both dynamic and statistical models, IMD's forecast predicts that the monsoon seasonal (June-September) rainfall will likely be around 96 per cent of the long-period average (LPA). 

However, if the EL Nino condition does occur, it could have a negative impact on domestic agricultural production, resulting in a decrease in rural income and an increase in commodity prices.

Disclaimer: The views and recommendations given in this article are those of the expert. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.