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Nothing in this correction, so far, seems out of the ordinary: Vetri Subramaniam, CIO, UTI AMC


“This time around, India’s macro health parameters are in far better shape than where we have been during past Fed tightening cycles. Also, the Fed has been very lax in terms of monetary policy for a long period. It would have negative implications for global growth given that China has its own set of problems. So, it would have implications for India as well in terms of growth,” says Vetri Subramaniam, CIO, .

It got scary a couple of days ago, it is getting better now. Do you think the storm has come and gone?
I have a slightly different opinion there. Nothing that I have seen in the last six months is particularly unusual compared to previous pullbacks that we have seen. We have always said that if you are going to invest in equities, you need to be prepared for pullbacks and when the market gets over extended in terms of valuations, the correction process is part of the normal. So corrections are not a bug in equity markets, they are a feature of equity markets.

So I tend to be a little bit more prosaic about this. I am not surprised by the extent of the selloff. It is a reflection of the fact that there were significant excesses in the market on the valuation front going back to the second half of 2021. Nothing in this correction, so far, seems out of the ordinary. Some of the expensive pockets have corrected. Central banks across the world had to pull back in terms of monetary policy and that is creating the catalyst for a setback in equities.



Will this be an ongoing process which could last for the next couple of months? Could equity as an asset class because of compulsion and adjustment, be available much cheaper?
It is certainly possible. The good news from a valuation front is that they work through a lot of the excesses, particularly in the largecap space. While we are still above the long-term average valuation, we are certainly within the comfort zone. But specifically on central bank policy, the forecast for where the terminal rate is likely to be is still to stabilise. For the US Federal Reserve, the Bloomberg forecast is for the terminal rate to hit about three-quarter, three-half sometime (3.25-3.50%) in the middle of next year.

If I look at the forecast for the repo rate in India, the Bloomberg forecast is a repo rate of above 6% by early 2023. But I would not palpitate too much about that because the more confidence the bond market gets that the central banks are acting to fight inflation, the more likely it is that we will anchor the long term rate which is more relevant from the equities point of view than the repo rate,

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Once the long-term rate is anchored, then equities markets can stop worrying about what is likely to happen on the monetary front and once again start to look forward in terms of what to expect from the growth and earnings trajectory.

It is a bear market in US equities. It is a bull market in Indian equities. Are we looking at a very different kind of setup? Historically what happens in the world impacts the emerging markets. According to financial literature, if the market falls 20%, then it is a bear market. We have not fallen 20%in India. India this time is genuinely different?
I would not go with these labels. These are labels created by humans in terms of what is a bull market and what is the bear market and those are meaningless. As investors, you should be guided more by where you think stocks trade at valuations which are attractive both from individual stock perspective as well as aggregate.

The 20%, 30% are thumb rules which are used as labels to indicate something but they are not the labels that I would use to determine my asset allocation or the way we manage strategies. The other point you made is more interesting. Is there a difference between the situation that the US faces and what India faces? I think the answer to that pretty unequivocally is that there is a difference. This time around, India’s macro health parameters are in far better shape than where we have been during past Fed tightening cycles.

It is also the case that the Fed has been very lax in terms of monetary policy for a long period. They have bloated their balance sheets and the pay back for that might be much longer than what we anticipate. Now this would have negative implications for global growth given that China has its own set of problems. The US is the other dominant world economy and so it would have implications for India as well in terms of growth.

But when we look at the health parameters, the sort of fiscal, the inflation numbers, the sort of trajectory of the economy, in all those cases, India’s position is looking far better and therefore one can expect that in India’s case, there’s more need to get a haircut rather than something structural.



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