3 sectors Ajay Bagga is bullish on for next week

“The Friday’s rally was largely triggered after the overnight rally in the US markets post the comments from Atlanta Federal Reserve President Raphael Bostic who supports raising the Fed’s benchmark rate to a range of 5-5.25%,” says Ajay Bagga, Market Expert

How do you look at the markets and the Nifty Bank which has shown a solid move? Also, do you think that there is a shift in fundamentals primarily on the back of the Adani development?

The situation is quite grim globally. The US Federal Reserve is expected to hike rates at least 3 more times, in March, May and June. Also, there can be another rate hike in July. The imminent risk for the market currently is March 22 when the Fed will release its next policy and the dot plot shall come again. So, while the December dot plot or the chart for the near term interest rate was at 5.1%, there is expected a new terminal rate nearer to 5.4%. For now, the Fed funds swap markets are showcasing a 5.5% terminal rate which is nearly 1% higher than the present rate. Thus, while the bond markets are indicating trouble, if the rates continue to soar higher like this then there is trouble for the equities too. This is as interest rate hikes result in outflow of foreign money from emerging economies like India.

The Friday’s rally was largely triggered after the overnight rally in the US markets post the comments from Atlanta Federal Reserve President Raphael Bostic who supports raising the Fed’s benchmark rate to a range of 5-5.25%. Further he iterated that the 50 basis point hike probability was quite small at about 30%, the large probability is 25 basis points for the next three Fed meetings.

Further, the reopening of China, robust PMI data from China, strong economic data from the US point to the fact that we are nowhere close to the recession. In fact we are in the midst of a market with a strong economy, high inflation and strong price increases that shall lead to increase in interest rates and that is the most worrisome thing.

Friday’s sharp up move was by and large a relief rally that was influenced by some of the positive global cues and domestic situation wherein some of the foreign investors have invested into the Adani Group. But if at all it is sustainable, I am skeptical of it.

As the voice regarding the El Nino effect gets louder and there is an expected intense heat wave this time, will rural consumption be at threat? Also, should one be focusing on these consumption related stocks?Between 1997-2022, we have witnessed 5 cases of El Nino and every time consumption has been hit except for 1997 where we were spared to an extent because we were amid the huge Asian financial crisis. So, this remains an obvious threat. Also, as we saw last year unseasonal strong heat during March and April, during which time the wheat crop matures stunts the growth of wheat and hence there will be a price rise. Nevertheless, the government has good schemes in place such as the Garib Kalyan Yojana through the implementation of which no one will starve in the country.

Also, rural consumption which is a big driver of the economy has been sluggish and that could remain sluggish till the next crop if monsoon is below the estimates. The last five times that El Nino came in the monsoon was more than 10% below normal. So the situation is not that good.

We will get a better idea of the situation by April and May and till then the markets might be skittish discounting that factor as it is an integral factor for the economy. The quarter three GDP numbers also showed private consumption which is 58% of the GDP was very sluggish and that is largely on the back of rural consumption not really picking up. We have seen that in two wheelers, we have seen that in other rural focus sectors and that could continue.

What sectors should be on investors’ radar and why going into the next week?

Banking and financials remain our top sectoral picks. In the last week also we saw a momentum in them and that should continue going forward too. Banks came with strong Q3 results and we foresee this year also to be strong for banks. Also, one may look at cement, industrial, roads, ports and all sectors that are seen to be beneficiaries of the government’s capex cycle from the short term perspective. Sugar- a small but very politically impacted sector is another space that can be kept on the radar as the global prices are edging higher.