Do you sense that ahead of the Jackson Hole Symposium later this week, the markets will continue to be choppy and there is expectation of some talk on taper? It is keeping the markets globally a little bit on the edge?
Definitely that is the big event for this week if not this month. Last week, when the July meeting minutes came out and the taper discussion had been quite concrete and talked about tapering starting within this year, we saw a correction mid week and then by Friday we saw a mild recovery coming back. But it was a losing week for the US markets. And the Fed is the central bank globally and it really sets the monetary policy. The Bank of Japan, ECB and the US Fed between themselves, have pumped in about $9 trillion in monetary stimulus in the last one year and that has really held up the global economy. So any talk of taper would be met with a lot of fear and volatility in the markets.
We were expecting that Jackson Hole meet to be more for strategy laying, where some research might be unveiled and September Fed meeting is when there would be actual talk of some taper starting by December or January. But post last week, that has been brought forward and we are expecting some concrete talk about how the Fed is viewing the taper. The Fed officials were very clear even in the July minutes that there is no correlation between the taper starting and the interest rates getting raised. They were at pains in subsequent speeches also to make sure that these two are separate.
We are expecting that the taper will start more in the mortgage bonds where they are buying $40 billion worth of papers. The size of the taper and the duration by when this $120 billion will come down to zero -- will it be over 12 months as we had earlier anticipated earlier or whether it be shortened to the middle of next year, are the questions that come to mind. So when the taper will start, the speed of the taper and the duration by when they will remove this tapering will be the three big factors.
Today, the European PMI numbers were quite strong, August composite PMI is 59 versus 60 odd for July. It makes the ECB meeting also interesting for this month. The market will be watching that as well. ECB has given nearly as much stimulus as the Fed this time around and they are very careful not to withdraw in a hurry unlike what they did in 2008. The hawks are not that strong in the ECB at present.
So overall, that is tilting the market towards a lot of volatility. There’s a lot of worry because the markets have been on the steroids from the monetary policy and removing that is not very easy. There would be withdrawal symptoms and that is what the market is worried about.
There is an opportunity as far as export-oriented stocks go. IT is already a winner. There is surely going to be a new tailwind to add for all these export related stocks.
Yes definitely, pharma, textile and some of the engineering goods exporters would also benefit. We are expecting the dollar to stay elevated for now. But the bond market is telling something else. I would say the positives are very high. A number of jobs were created in July and August and for the first time, we saw unemployment benefits going down.
The negatives for going into Jackson Hole are that the leading indicators are tapering off. There is a slowdown in China and it looks like the US indicators are slowing. Consumer sentiment is down and also the retail sales were not as per expectations. So it is a mixed bag. Clearly, the unemployment rate is still high even though inflation is also high. The inflation texture is still very much transient. Things like used cars or existing home sales are driving a lot of the inflation. Core inflation is not that high. If you strip away the food and the fuel, then the numbers are not worrisome.
This time around, they might not give a prognosis on the future and the dollar stays elevated, that will mean commodities are suffering. We can expect some amount of minor rupee depreciation. Exporters will gain. The best way to play is IT which the market has figured out. Pharma still has issues. It will be very stock specific. We have seen corrections that have come into Aurobindo Pharma or Lupin or Dr Reddy’s on news flow.
In pharma, one has to be more choosy but in the macro sector view, I one is much better off in IT. Textiles is still a story which will depend a lot on some more policy events happening and then we could see textile restarting its growth upwards. Right now what has happened is it went up and then we have seen a pause and a consolidation happening. It is really waiting for another catalyst on the textile side.
Monday belonged to IT. We are also seeing a change in leadership when it comes to IT with dark horses like Tech M coming up. Smaller ones like Mindtree, Coforge have also picked up. Which are the bigger winners in the IT pack?
I would say largecaps. Scale will get scale and we have seen Accenture, IBM and Cognizant getting bigger orders. Our IT companies will do the same. The trend is a multiyear one. What is driving HCL Tech today is the Munich RE order. Those kinds of orders are coming in. In Cloud, we are still lagging behind Microsoft and Amazon and Cisco. Our companies will start gaining traction there also and the entire move to digitise the offices to make work from home easier for companies after companies will gain more traction.
I have a lot of friends in these companies at senior levels, in consultancies and big manufacturing companies are automating their entire process, not only SAP but their office functioning and their MIS control measures so that senior executives do not need to travel as much and a lot can be done. So digitisation, automation, Cloud, are multiple levers for IT and Indian IT is well positioned.
Covid has been like a Y2K kind of an event in terms of giving a push to digitisation. We do not have consumer tech companies, the first platform companies are now coming in. We will get a chance to share in that prosperity creation as well but we have these old service IT companies, let us go and load up on them is what I would say.
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August 24, 2021 at 10:39AM
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Load up on old IT services companies: Ajay Bagga - Economic Times
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