Are we in for a soft patch from here till Diwali? Now we have to deal with the Delta variant, the is showing strength and crude is hurting.
We should be worried about the dollar only because the Delta variant is well factored in. But what people are not factoring in is the impact of a rampaging US dollar. The US dollar was the most shorted currency till maybe two-three months back. Now the entire trade seems to be reversing. Historically, we have seen almost 95% between US dollar rallies and emerging market underperformance and outflows from emerging markets. In very few cases this has not played out.
An improving US economy combined with higher inflation makes a perfect case for the US dollar to rally and all of us know that there are many hedge funds which have huge short positions on the US dollar and long on maybe commodities or cryptocurrencies to balance that trade. The entire trade will get unwound in the short run and then we will have the valuations to grapple with where Indian markets at 23 times next year earnings trade at 20-30% premium to historic valuations.
I would think that on the broader large cap indices — the Nifty and the Sensex — have very limited upside left. People will have to look for ideas below that for stocks which will benefit from some recovery in the economy and lower interest rates. The case for a correction in markets is increasing by the day.
What are the chances that this time around the strength in dollar will lead to weakness in commodities and the world would say commodity prices have gone down and inflation fear is behind us, let us start celebrating again?
The drivers of inflation in the western economy are not purely commodity led unlike in many emerging markets. It is more to do with the overall demand scenario, employment scenario, the movement in real estate prices, etc, which might not moderate even if commodities moderate somewhat. The bond yields spiked up then they cooled off because almost the entire issuance of long-term bonds by the US government on a monthly basis is being bought up by the US Fed.
So net issuance is very low and to that extent, there is a management of market happening by the US Fed and they are able to manage it. Now how long they will be able to manage it is a question I find tough to answer.
So as the US dollar is tough for anyone to manipulate, to that extent, the correlation of the US dollar move through emerging markets is direct and real. Now whether the US dollar rally will falter and everything will be back to square one is something that can’t be ruled out but I would not bet on it. There is a bigger probability of US dollar rallies further creating some weakness in risk assets.
Why is there buoyancy in ?
That you have to ask the people who are buying. What seems to have happened is that some brokerages suddenly decided to get up and upgrade Dabur to a buy and they must have looked at some relative valuations, company commentary, etc and that is leading to this rally. Beyond that, Dabur is one of the most underappreciated FMCG companies with their significant track record of launching new products and making them successful. They somehow do not get the kind of credit which many of the other fancied FMCG companies get.
On absolute valuation, Dabur is not cheap. But on relative valuation compared to other FMCG companies, it still trades at 15-20% discount and its volume growth even now seems to be quite strong in the market in which it operates. There should be further upside to Dabur but on an absolute basis, it is more likely to be 10-12%.
What would you be betting on with respect to the agri theme?
This time, the agri theme is not so clear. After the normal monsoon forecast, we saw a significant runup in most of the agri theme stocks — agrochemicals, tractors and some of the FMCG names. But now the monsoon seems to have stalled. There are apprehensions that because of negative IOD, the monsoon may not be as great as was expected initially. And that could put a spanner into some of the expectations which have got built into the companies.
It will be critical to work out the progress of the monsoon over the next two, three weeks because that not only impacts the agri theme stocks but the overall inflationary dynamics with food inflation, the overall economy and the way the MPC will respond to any inflationary impulse. It is tough to take a call on an agri theme right now. The next couple of weeks will define what is going to happen.
