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  • Prakash Diwan - Director, Altamount Capital Management

    Prakash Diwan

    Director, Altamount Capital Management

    DATE: September 09, 2015, 12:00 PM

    SUBJECT: Are the markets prepared for a rate hike by the US Federal Reserve?




    Hello. Welcome to the webchat with Prakash Diwan, Director, Altamount Capital Management on "Are the markets prepared for a rate hike by the US Federal Reserve?"

  • R


    I believe that 0.25 % increase in interest rate by US federal should not have disturbed Indian markets which are yielding returns of better than 5%. Then why the sharp correction? Is it that foreign investors internally want to bring about a correction in the market and re-enter at lower rates?


    First & foremost, let me reassure you that the recent flight of capital that we are witnessing is not just from the Indian markets, but more of a phenomenon that is afflicting almost all Emerging Markets (EM). And the basic premise behind this behavior is a more generically disposed asset reallocation call that is taken by global investors to move out of EM Equities and hence the exodus. Yes, I agree, the potential rise in interest rates in the US may not be too big a quantum, but it is the signaling of the change in direction of interest rates that most investors would factor in, were the US Fed to go ahead and hike rates. And since the exit from equities in Emerging Mkts is driven by a timing call, there is little heed to fundamentals that is given by the exiting investors, thereby making the behavior seem irrational to the lay observer! I don’t think the ploy is to bring markets down to facilitate a re-entry at lower levels, though it may end up seeming like that as and when the FIIs re-enter Indian markets at lower levels!

  • B


    why despite the much reduced dominance of US in world economics and politics , the impending U.S. Rate hike is sending chills down the spine of the world financial system ? Why no other world currency could pop itself up to mitigate hegemony of USD without commensurate intrinsic strength!


    The US currency has always been pegged as the anchor currency for most global trade, primarily since the time President Richard Nixon prevailed upon the OPEC to keep the USD as the currency of reference for oil trades. This has paved the way for the USD to have its swathe across markets, across currencies, particularly in the absence of any other economy attaining a challenging size. The Euro could, in theory, possibly have been a challenger ( and in certain phases, did come across as a strong contender to that position) but for the collapse of the collective might in the past 4-5 years. As a result of the dominance of the USD, most surplus economies end up having to buy US Treasury Bonds and park themselves in the safe haven USD – China and Japan being the most prominent ones! A shift in the underlying rate for these treasuries therefore becomes a significant parameter to alter overall portfolio composition. The requisite changes in asset allocation therefore leads to the seemingly tectonic shifts in most global markets!

  • R


    What could be the possible impact in the short term on the Indian rupee in view of the possible US Fed rate hike?


    We could see a relative weakness in the INR on an immediate basis till the time inflows into our markets (either in the form of portfolio flows or FDI ) resume or till the time the RBI decides to use its recently built war chest to arrest the fall. My guesstimate on this count is a level of 70+ for the USD-INR pair on the extreme followed by a reversal all the way to sub-60 levels is a year from there!

  • S


    Will any stocks or sectors be adversely impacted in case of an upward revision of interest rates by US Fed? Also, what is your take on export-led sectors such as IT and PHARMA?


    Let me explain the sequence of cause & effect if the US rate hike were to happen: A hike in the rates will swing more money towards the USD denominated instruments and that in turn would strengthen the USD further, thereby weakening the INR. Therefore, sectors that involve import of goods/services payable in USD would get impacted adversely. The impact on crude is likely to be negative (though it could presently get cushioned with the underlying softness in crude prices) - similarly high end engineering products/services that are paid for in USD terms will have an adverse impact - imported goods/components used in the auto sector, electronics, instrumentation, etc could tend to be impacted unfavorably. However, the areas that are likely to get impacted negatively are far outweighed by the benefit that export oriented sectors can derive! It will certainly be +ve for IT & Pharma (one of the reasons why we have not seen these two sectors succumbing to the recent meltdown in stock markets!) Resilience of some of the IT players like INFY, TCS, TATA ELXSI make these as ideal winners.

  • J


    Please help me understand. In India, interest rates at close to 8%; in US, it's 0%. Even after a rate hike by Fed, it won't be more than 1%. Why would FIIs want to opt for 1% interest when they are already getting 7-8% in India? So, are the fears of capital flight from EMs in general and India in particular exaggerated? What does India really stand to lose in the short term if the Fed rate hike becomes a reality next week?


    Jeevan, part of your question has been answered in my response to Ramesh's query (the first in this chat, if you were to scroll down) More important than the quantum of hike in US fed rates, it is the all important change in direction of interest rate movement that most investors would be keen on factoring into their reallocations. The change in the environment where money was virtually free (0%) to a rising cost to funds, it becomes an important parameter to watch out for. We tend to only lose out on peace of mind and stability in the short term but gain a lot in the long term!

  • V


    Foreign institutional investors were huge sellers in Indian equities last month, the highest since the beginning of the global financial crisis in January 2008. What are the other factors that could have possibly led to foreign investors booking profits apart from the prospects of a rate hike by the US Fed?


    Apart from the imminent fear of losing out in USD terms, the FIIs would have also factored in their disappointment on some other counts, viz. The NDA Govt's ability to push reforms as promised on GST, Land Acq, etc., the inability of banks to pass on lower interest rates to consumers, the weak monsoon and the weak corporate earnings for the quarter gone by! And the valuations of some mid caps and stocks in sectors like PHARMA, BANKING, CONSUMPTION, AUTO ANCILLARIES were also at a stretch, prompting the profit booking impulse!

  • A


    With interest rates in the US near zero levels corporates have borrowed dollars to fund acquisitions outside the US as a result of which the dollar carry trade has led to asset price inflation. What could be the possible impact on Indian companies that have huge dollar loans at the time of repayment and the subsequent impact on earnings?


    While the USD may see a distinct trend of appreciating vis-a-vis the INR for the next few months/quarters, the relative attractiveness of india as an investment destination, as and when it gets discovered will see a reversal in this INR weakness. Co's that have repayments scheduled beyond a year or so may not have to face the adverse situation since the expectation is that the INR will start firming against the USD by start of 2017, late 2016. For the repayments due within the next 12 months, the impact could be significant!

  • A


    Whenever the US Fed does increase rates, do you think it will be a token increase followed by a long pause or do you expect a series of hikes spread over, say 6 - 8 months? I hold shares of Apple, Microsoft, Facebook, GE and Exxon. Do you see better prospects for these stocks over the next one year? Which ones should I stay invested in?


    The time gap between the first hike and the subsequent one could be long enough - around 2 or 3 quarters, primarily to assess the impact on various parameters. Certainly, if the US economy is likely to continue doing well, these marquee names will certainly deliver. Apple, FB & GE for sure... MS and Exxon are not my top picks.


    Thank you, Mr Diwan, for answering our readers' queries. We also thank our readers for sending their queries. Hope to see you soon.


    Most welcome!

    Disclaimer: The stocks discussed could have been recommended to clients, but no personal holdings.