Talking Points This Week: ‘RRR’ – Rates, Risks, Revisions

Every week, Niraj Shah studies how top business leaders and market makers are navigating the fast-changing financial landscape.

The dollar continues to be on a tear at large, and as we observed last week, it is leaving a trail of destruction across the forex market. This week was less about King Dollar and more about Federal Reserve commentary from the United States, and earnings outlook back here in India. Bajaj Finance and SBI Cards led people to believe that unsecured consumer finance could make a strong comeback in FY23, and the results and the stock reactions of both stocks showed that. No such luck for auto majors, especially Tata Motors, which had a forgettable quarter even as the outlook from analysts remains bullish. While pharma made a comeback, it is still evident that solvent prices, a key input for the sector, continue to pose problems. On Wall Street, while the performance of companies like Snap, Shopify, and Meta was a drag, Apple and Amazon lifted spirits by the end of the week. Hence, earnings and the Fed remain centrestage.

Fully ‘Fed’

This time there was no ‘leak’ in the Wall Street Journal, warning or preparing the markets for a large rate hike. But none was needed. The market was prepared for 75 basis points and maybe more bad news. What it got was a 75 bps rate hike, but a Fed which was non-commital to the quantum of rate hikes in the future, quite unlike the Fed of the previous meeting. As a result, the market consensus is now gathering around two more 50 bps hikes in September and December FOMC meetings, with the fed fund rate peaking around 3.4%, lower than the previously estimated 3.8%. This led to a sharp rally in risk assets, with the Nasdaq Composite closing over 4% higher on the day of the Fed announcement, and other assets like Bitcoin and gold rallying as well. Noticeably, twice in a row, the U.S. 10-year bond yields did not jump post such sharp hikes, a sign that the markets are now preparing for the afterlife.

(Z)omato Soup!

Among the American technology behemoths, the likes of Meta and Alphabet disappointed the street while Apple and Amazon gave cause for cheer. There was a common trait of disappointment across some tech earnings, with the Shopify CEO's comment about the rationale for layoffs being a noteworthy one. Tobias Lütke's memo said that layoffs are necessary as consumers resume old shopping habits and pull back on the online orders that fueled the company’s recent growth. It wasn’t exactly the last straw on the camel’s back, as markets did quite well at large and therefore there wasn’t a tech selloff in the truest sense, but it did bring to the attention the risks of investing in heavily valued consumer-tech names, as the companies themselves might be re-calibrating their business plans.

India too saw the large tech services firms bounce back this week, but consumer tech had volatility written all over it. If the stock price of ITC was the darling of the meme-factories in India in 2021, Zomato probably has unseated it in 2022, with a sharp 30% from the July 12 price of Rs 59/share in just a fortnight. The stock has recovered marginally after a slew of brokerages like Credit Suisse and Jefferies came out with positive notes and the selling pressure subsided. But with talks of one of the large investors possibly selling shares after the promoter lock-in period got over, the rotten run for Zomato shareholders may not necessarily be past them.

Earnings Revision Risks?

Is there a revision risk to earnings estimates? The jury is out, especially after the commodity price cool-off. A recent BofA Securities note sounded caution on earnings. The house has taken a look at several early anecdotes indicating a possible worsening of the domestic demand outlook. BofA analyst Amish Shah believes that street is yet to cut Nifty PAT meaningfully (revisions are flat month-on-month), despite several emerging risks viz slowing growth (both global and domestic), adverse policy interventions, currency depreciation and rising rates. According to BofA, management comments and anecdotes point to a slowing demand outlook. We know that FMCG companies have highlighted volume erosion on high inflation, while some consumer durable companies are taking production cuts of 15-25%.

This is borne out in the commentary of select companies on BQ Prime as well. Dixon Technologies, which makes products for electronic brands, spoke about the low consumer demand for electronics, which led the company to revise its annual targets lower. Havells described how developers and construction firms have deferred their purchases in wake of rising costs. The startup world is full of stories of layoffs, and it is safe to surmise that a rise in job losses could also hit discretionary demand in India. Domestic steel demand remains subdued with steel companies having advanced planned shutdowns as inventories have piled up, both of which were corroborated in the interaction that JSW Steel Joint Managing Director Seshagiri Rao did with BQ Prime. Could it change closer to the festive season? Sure it could. But it might be prudent to wait and watch.

‘I’m So Bearish, I’m Bullish’

That was the peg line of the July BofA Fund Manager Survey, which showed a dire level of investor pessimism. Global growth optimism, cash levels, and equity allocation are all worse than levels during the global financial crisis. Expectations for global growth and profits were at all-time lows, cash levels with fund managers were the highest since ‘9/11’ and as a consequence, equity allocation was the lowest since Lehman. The note went on to say that the BofA Bull & Bear Indicator remains “max bearish”, and while H2CY22 fundamentals remain poor, the low sentiment indicates that stocks/credit would see a rally in the coming weeks.

That note, and then some good results, came to the Indian shores at the mid-week point, and sure enough, the going has been positive since then. In the current context, bulls would take this near-1,000 point move on the Nifty from mid-July. Let’s see if the markets have it in them to make a dash towards 17,500 on the Nifty, or whether we succumb to the sell-on-rise regime again. The global markets might have that answer.

Niraj Shah is Markets Editor at BQ Prime.