In this week we had the US CPI inflation data which surely did cool off and took the markets higher but how much trust as an investor we should be having because in the past one month we have seen a one-way rally on the upside? Do you feel that we are out of the woods and should one really be optimistic?
We have to be optimistic, but not go all in. I had advised about 20-25% allocations in July and another 15% in August on the back of the falling inflation. What is very clear is that the dollar peak is behind us. The dollar index peaked at about 109.2 and it has been in the 105 to 105.5 range ever since. So, maybe a peak dollar has happened for this market cycle. Have peak rates happened? I do not think so.
Markets are a bit complacent, especially the US 10-year is not reflective of the Fed funds rate peak and so there is some way to catch up there. Peak inflation-wise, the fall in the commodities has helped us but a lot of the portions of the US CPI, which are actually out of the control of the Fed, are still seeing growth.
Flows wise 11 billion dollars came into the US equity funds over the last one week, 7.5 billion dollars came into global equity funds and India is seeing that as well. July was good, August has been very good in terms of FII inflows returning to India. So, I would be optimistic but cautiously optimistic. We are not out of the woods. The good thing is two or three historical market performances are now in our favour. First is that 12 months from the start of the Fed cycle markets tend to outperform; the first three months are pretty bad. We have had that, so now this market rally is giving us some boost for that. Second, in US mid-term elections, 12 months before October, the markets tend to underperform and then they shoot up for the next 12 months and 24 months. So from October, the next 12 months are normally the best months for a US presidential cycle. Historically that data from 1926 bears this out. My personal thinking goes September, or October we would probably bottom out, maybe we have bottomed out already. So, a good time to start allocating but not all in. Good time to be optimistic but cautiously optimistic.
When you say good time to be cautiously optimistic which areas and which pockets are you finding interesting?
Smallcaps and midcaps have underperformed and normally as the economy picks up, they tend to outperform but I would say probably for six months more you should stick to quality. If there is some good quality smallcap, midcap that you like on a cash flow basis by all means go through.
The quality sectors that we like very consistently are private sector banks which have really led the way. Materials, capital goods and automobiles are some of the sectors while IT is a contrarian bet. I have consistently said we have not seen IT spends getting cut even the Gartner studies are pointing towards a 6-7% growth in IT spends. The commentaries from our management are pretty strong. I think IT might be a good sector, again stick with quality IT.
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