Dalal Street set for a sustained upswing as RBI interest rates peak

• Markets poised for a sustained upswing but retail interest low with very few IPOs.
• Markets across the globe are not perturbed by risk of recession. Samco’s Jimeet Modi points out that even though Germany has slipped into a recession, the German market is making new highs.
• The gold rally is a catch-up as the yellow metal hasn’t really done anything in dollar terms over the last 10 years.

There is constant chatter that the recent rally in equity markets is different from the past ones. Even though markets hit new highs all through May, the go-go sentiment is clearly missing and the primary market is still comatose. With the Reserve Bank of India’s Monetary Policy Committee expected to hold rates this week, Jimeet Modi of Samco Ventures in an interview with Business Insider, says the market is set for a good uptrend. Edited Excerpts:

The markets have been hitting new highs this month. Do you think that the rally has legs to carry on?

We have been in a broad time correction since October 2021. I think now the base of the market is right for a good uptrend to resume for a variety of reasons. The first reason is predominantly because interest rates have peaked. The peak of the interest cycle is behind us so either rates will be flat from here on or they will start declining. We expect both global as well as India’s rates to start declining from November or December, which will support equity markets.

Also a lot of the froth of the equity markets has subsided. If you look at retail participation, F&O trading or overpriced IPOs then they are all indicators of froth in the market. If these indicators are buoyant and markets are close to highs, then it is a moment of caution. Currently, if you see markets are at all-time highs but there is very little retail interest and very few IPOs. The sentiment is poor. A combination of markets moving to new highs and poor sentiments sets up a base for a new rally.

Barring any negative surprises globally or any large accidents in the financial system, we should make a series of new highs in the second half of this year and next year as well, as we build up towards the next general elections.

The stage is set for a new rally. Broadly this rally will also be led by foreign investors coming in. Historically we have seen that whenever US interest rates peak or flatten, money returns to EMs. This time India is on top of the list as far as flows are concerned. We anticipate large capital flows to come into India and despite sentiments being negative institutions will drive markets up.

What is your target for markets at the end of the fiscal year?

We typically don’t give a target for a fiscal year period. However, I think generally we are of the view that markets are set for a 12-15% rally in the benchmarks.

Do you expect recession across the developed world to derail this rally in India?

Our view is that when an event is as highly anticipated as this one, in all probability it is already priced in. Even if Germany has slipped into recession, German markets are making all time highs. Since markets have already discounted some kind of recession in the US and broader growth slowdown. Our sense is that recession is priced in. Barring any black swan event, markets will take the recession in their stride and move ahead.

What kind of a black swan event could derail the current rally in the markets?

Let’s say if a large global bank, much larger than SVB, goes belly up. If the current war extends itself, which at the moment seems unlikely. A black swan is a black swan and it tends to come when it is least expected.

Gold has been rallying in anticipation of a recession. What is your reading of the precious metal’s performance?

When you look at gold, one way to look at it is in rupee terms and the other is to look at it in dollar per ounce terms. When you look at the India context, gold has driven returns due to local currency’s depreciation. If you look at the price of gold and the Sensex, they have directionally moved together. Our sense is that the last few months' rally in gold is a catch up as gold had underperformed. In dollar terms, gold is where it was a few years ago. Gold has not done anything for 10-12 years. It is a currency play in India. We are not of the view that gold prices are a sign of any crisis.

Foreign investors are coming back to India. How does India look compared to China?

From a global standpoint, India looks like a sweet spot. Our view is that India has been just one asset class in the basket of emerging markets. India was just another emerging market when investors were buying the EM bucket. In the next 10-15 years, the attitude towards India will change. We firmly believe India will be an asset class in itself. It won’t be just one among other EMs. This is a shift in sentiment we are seeing.

There is also evidence that when economies are moving from the $2.5 trillion GDP to $5 trillion levels, markets in those countries perform the best. This happened in Japan and China. While GDP doubled in some of these countries, markets went up 5-10x. People believe that India is on the same trajectory too. As we make the journey there is a belief that Indian markets will be the best performing markets over the next decade. Even though India looks expensive compared to our historical averages, it is hard for foreign investors to miss out on India. It is for this reason that we are seeing a large shift in allocation from Chinese equities to Indian equities.

We will see an unprecedented amount of money coming into India over the next couple of years. Our sense is that we may see $45-50 bn coming into India in the next couple of years. The weight of India in overall asset allocation is going to go up.