Investing in stocks: good time to start allocating money to stocks; staying cautiously optimistic: Ajay Bagga
This week we had the U.S. CPI inflation data which surely cooled and drove the markets higher, but what confidence should we as investors have because over the last months we have seen a one way rally to the upside? Do you think we are out of the woods and should we really be optimistic?
We must be optimistic, but not give everything. I had advised about 20-25% allowances in July and an additional 15% in August due to lower inflation. What is very clear is that the peak of the dollar is behind us. The dollar index peaked at around 109.2 and has since been in the 105-105.5 range. So maybe a record dollar has happened for this market cycle. Have spike rates occurred? I do not think so.
Markets are a little complacent, especially the US 10yr does not reflect the peak in fed funds rates and so there is a way to catch up. As for peak inflation, the fall in commodities has helped us, but many parts of the US CPI, which are actually outside of the Fed’s control, continue to rise.
In terms of flows, $11 billion has entered US equity funds in the past week, $7.5 billion has entered global equity funds and India is seeing this as well. July was good, August was very good in terms of influx of FII returning to India. So I would be optimistic but cautiously optimistic. We are not out of the woods. Fortunately, two or three historical market performances are now in our favor. First, 12 months into the Fed cycle, markets tend to outperform; the first three months are pretty bad. We had that, so now this market rally is giving us a boost for that. Second, during the midterm elections in the United States, 12 months before October, markets tend to underperform and then soar for the following 12 and 24 months. So, starting in October, the next 12 months are normally the best months for a US presidential cycle. Historically, these data from 1926 confirm this. My personal thought goes in September or October we would probably be at the bottom, maybe we have already bottomed out. So a good time to start allocating but not all. A good time to be optimistic but cautiously optimistic.
When you say good time to be cautiously optimistic, what areas and pockets do you find interesting?
Small and mid caps underperformed and normally when the economy recovers they tend to outperform but I would say probably for another six months you should stick to quality. If there are good quality small and mid caps that you like on a cash flow basis, go by all means.
The quality sectors that we appreciate very regularly are the private sector banks that have really led the way. Materials, Capital Goods and Automotive are some of the sectors while IT is a contrarian bet. I’ve always said we haven’t seen a reduction in IT spending, even Gartner studies point to 6-7% growth in IT spending. Feedback from our management is quite strong. I think IT could be a good sector, again, stick with quality IT.