Expert view: Vipul Bhowar, senior director and the head of equities at Waterfield Advisors, says the peak macro panic appears to be behind us, presenting an ideal opportunity for staggered value accumulation. He expects the end of the US-Iran conflict to catalyse margin expansion in specific sectors, such as FMCG, paints, and exporters, leading to sectoral rotation rather than a uniform uplift across the market. Edited excerpts:
The Middle East conflict has created one of the biggest macroeconomic challenges for the Indian economy in recent times. Do you think the end of the war will trigger a sharp rally in the market?
The end of the will likely spark a “relief rally” as markets hate uncertainty, and its resolution will boost sentiment.
De-escalation will lower the risk premium on Brent crude and normalise freight costs, giving the more leeway on inflation and potential rate cuts, which equity markets will welcome.
However, the longevity of this rally will hinge on whether earnings align with valuations and if domestic consumption, private capex, and margins improve.
Instead of a broad rally, expect the war’s end to catalyse margin expansion in specific sectors such as FMCG, paints, and exporters, leading to sectoral rotation rather than a uniform market-wide uplift. Ultimately, focus will return to the domestic earnings trajectory.
How can the second and third-order impacts of elevated crude oil prices impact market performance?
A higher oil import bill impacts gross margins in sectors such as paints, tyres, chemicals, and FMCG packaging, as well as freight costs.
This persistent inflation compels the RBI to maintain higher interest rates, delaying rate cuts.
The real concern arises from inflation’s effect on consumer spending; as household budgets tighten, discretionary purchases such as two-wheelers and white goods decline.
Additionally, if the government reduces fuel taxes to alleviate pressure, it could worsen the fiscal deficit, raise bond yields, and slow down government capital expenditure.
These factors—margin compression, reduced demand, and elevated capital costs—lead to earnings downgrades and a decline in market valuations.
While the worst appears to be behind, is it the right time for bottom fishing or should one wait till the market stabilises?
The peak macro panic seems to be behind us, presenting an ideal opportunity for staggered value accumulation.
Equity markets anticipate future conditions, and waiting for clear stability could lead to missed rallies.
The highest returns are generated during the transition from uncertainty to stability.
We are selectively investing in market leaders that have maintained their margins, pricing power, and strong balance sheets during recent stress, as they will show significant operating leverage when conditions normalise.
Since banks are a proxy for economic growth, do you think the sector may underperform over the medium term?
The sector may underperform or consolidate in the coming quarters as we hit peak Return on Assets (ROA).
Earnings have been boosted by provision write-backs and low NPAs, but that support is fading.
Banks are in a structural ‘war for deposits,’ with household savings moving to capital markets, pressuring CASA ratios and keeping fund costs high.
The RBI’s rate easing is softening yields on advances faster than deposit costs can adjust to, leading to margin compression and limited options for credit cost relief.
As the macro economy grows, banks face micro-level challenges.
What should be our strategy for the consumption theme, considering inflation may rise further, growth may lose some steam, and the job market remains dull?
We are focused on the ‘premiumization’ theme in discretionary spending, as the top tier of the Indian demographic remains insulated from wage stagnation and inflation.
Our consumption strategy is a barbell approach: targeting premium products on one end and price-defensive essentials on the other.
In the mass market, we are pivoting to staples by targeting market leaders with strong pricing power.
In a squeezed economy, consumers will downtrade, benefiting companies with effective sachet pricing and deep rural distribution.
What are your expectations for the Indian rupee? Can it fall to the 100 mark this year? How can the rupee’s weakness impact Indian investors?
For Indian investors, a controlled depreciation of the rupee has mixed effects.
It benefits export-oriented IT and Pharma companies and enhances returns for globally diversified portfolios, but poses challenges for import-heavy manufacturing.
My main concern with a weak rupee is the potential for sticky inflation, which could compel the RBI to maintain higher interest rates, keeping capital costs elevated.
The spot rate is currently pressured in the 96-97 range due to high crude prices and a widening trade deficit.
Although 1-year forward premiums have exceeded 100, the RBI, with a forex reserve of nearly $700 billion, is likely to intervene to ensure a gradual depreciation rather than a sharp decline.
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Disclaimer: This story is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.