‘Fed rate-hike likely in December, but need clarity on trajectory for 2017’

The coming few months are going to be crucial for the global markets as the US elections and Federal Reserve policy review are going to come up. At home, the key triggers will be Q2 earnings and RBI policy review. Speaking to BTVi , HDFC Life Chief Investment Officer Prasun Gajri says investors will have to closely watch what’s coming. Very few can predict what can happen in the US elections. So, markets will react positively or negatively. The belief is there will be a Fed rate hike in December. But there has been reluctance by the Fed to raise rates.

October is usually a volatile month with lots of news and developments that are likely to play out. What will you focus on as we head into the last quarter?

As October comes, the second quarter earnings should start; those are going to be the crucial thing for the markets. The markets have been bearing for an earnings recovery and we all are hoping for an earnings recovery to start. Some early signs were seen in the first quarter, but nothing very definitive. The second quarter becomes even more important to see if the hopes — which the markets have on an earnings recovery — really start coming through this quarter. I think that is going to be a crucial thing. Apart from this, the usual RBI policy — which I do not think is going to be a negative surprise for the markets.

I want to break up the companies that are listed in the market and their correlation with the economy, into three types. One, when you apply the break or press the accelerator we get the same acceleration in the stock markets. Two, when you break, there is a little bit of lag, but it is still passed on to the stock markets. And three, where there is very little correlation between what the economy and the stocks are doing. In the first category, there seems to be almost a one-to-one correlation — and there we have two- and four-wheelers. How significant could that be for the companies in the automobile space?

I think there is really no worry to decide what will happen. But, given the broad macro indicator, one would expect something of that kind to happen over the next 3-5 years. But in the short term, I think auto stocks have been doing very well. The belief is that as the Pay Commission payouts happen, as the festive season approaches, and with the monsoon being good, the numbers — which these companies can deliver as far as volumes are concerned — should start picking up. We have seen a pick-up in the wholesale inflation numbers. The inventory levels have definitely gone up within the system, especially in two-wheelers. So, one will really wait and watch how the retail numbers pan out, and I think the stocks are reflecting a pretty positive picture as far as the volumes are concerned. So if they do not come through in the short term, it could be disappointing.

How will the markets react on the overseas developments, such as the US elections and the possible Fed rate hike in December?

I guess you have to take it as it comes. I don’t think there is anybody in the world who can predict what can happen in US elections. So markets will react positively or negatively to what happens. As far as the Fed rate hike is concerned, the belief is, it will happen in December. But, there has been reluctance by the Fed to raise rates, in the past. So while there is a chance of rates getting raised in December, I don’t think we will get any clarity on the extent and pace of rate-hike in 2017.

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