Investment strategy: As the market falls, should you buy the dip?

“The next three months will be choppy because the cut is aggressive. Inflation data in the United States is quite high and a little worrying for policymakers there. So the next three months may be choppy, but look anyone with a one to three year time frame, should be looking to buy on dips,” says Rahul Chadha, Chief Investment Officer, Mirae Asset Global Investments.

Suddenly the FII is selling India. Looking at the last 40 days of trade data, the number of sales is almost at Rs 80,000 crore. One of the release patches we’ve seen in a very long time. What changed? India is still a fantastic story – strong growth, decent valuations – why are you selling?
We kept our overweights in India at very high levels. We continue to love the one to two year story. But one likely reason FIIs are selling India is that it has significantly outperformed markets like China and other emerging markets. There is an outflow of EM funds because so much of the EM universe is not doing well. And given that peak liquidity is behind us, some of the money is flowing out.

Do you see this trend continuing into 2022?
The next three months will be hectic as the tapering is aggressive. Inflation data in the United States is quite high and a bit worrying for policymakers there. So the next three months can be choppy, but look at anyone with a one to three year timeframe, should be looking to buy lower. We continue to believe that we are still at the beginning of the economic cycle.

There is real fear around tapering but let’s not confuse tapering with tapering tantrum as the situation is very different from the last time it was introduced. So if fear is something that is being resolved, do you think exits to emerging markets and India could multiply?
We tell our investors that it’s not like 2013-2014. Fiscal deficits are much better, more importantly, current account deficits are significantly lower than they were in 2013-14. We found no maldistribution. So there’s a bit of a sell-off going on but we wouldn’t be too worried about that. As long as profit delivery occurs, again for bottom-up investors, this provides a good opportunity to add exposure.

So you’re saying we shouldn’t worry too much about the sell-off that we’ve started to see. But something else that has happened is inflation. Look at England, the highest inflation in 10 years and the United States, the highest in 39 years and a depreciating rupee. How to play with that on the markets?
It’s sort of a key priority and it’s on the minds of most decision makers. That’s why we’ve seen this monetary policy move from extremely accommodative to neutral or tight, but we believe this hyperinflation that you’re seeing is going to be transitory. A large part of this inflation comes from supply shocks, these bottlenecks that have arisen in Asia due to the diffusion of the Delta variant. Now, with the improvement in vaccination over the past six months, governments would be much more willing to steer economies away from lockdowns. As that happens, some of the supply bottlenecks would clear up, demand that is, say, 5-7% above 2019 levels would also normalize within six to next nine months. I don’t think we would be too worried about this exceptionally high inflation in the middle of 2020. In March, we will see the peak of this inflation, and then it will come down towards the end of the year.

As we all go through volatility, wait for central bank action around the world, will it once again be defensives like the IT sector?
Over the next two months, it makes sense to be a little defensive and go for IT, hospitals, some of the commodities. But we must take advantage of this opportunity to also expose ourselves to economic cycles. What happened was that most FIIs, including us, were overweight banks and they bore most of the pain or the brunt of selling FIIs. That’s why they didn’t play. But the beginning of the cycle is not bad for banks; they will see a recovery in credit, spreads will improve and as NIIs improve we should see banks performing as well.

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