dr. Joseph Thomas, head of research at Emkay Wealth Management, said the rupee may remain weak and tend to decline in value. There are two factors in the case of Rupee that are always relevant, trade and investment. Trading may not be such a determinant right now.

Prior to joining Emkay, Joseph spent nearly 12 years with the Aditya Birla Group as Head of Institutional Sales and as Head of Investment Research & Advisory at Aditya Birla Money and Aditya Birla Money Mart.

In an interview with Zeebiz’s Kshitij Anand, Thomas said a weaker rupee is investing exporters with currency gains and while robbing importers of their dollars. Edited excerpts:

Q) What does the BJP victory mean for markets, economy and reforms?

A) The BJP’s victory in the three states means on the face of it that there is a general acceptance of the government’s policies and programs by a large part of the population.

The ruling party has retained the states it has held in power for the past five years. But when it comes to electoral gains and losses, the logic may not be as simple as this one, due to the social undercurrents in each of the states that have gone to the polls.

The after-effect of the result is continuity in government and policy. For the wider economy and markets, this may not be as important as in national elections, as all major policies and programs come from central government and national institutions.

The electoral victory and continuity achieved in the face of persistently high inflation, rising fuel prices and insufficient job creation is something that brings comfort to the ruling party.

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Q) What is your opinion on the rupee? Which sectors could be most affected by recent volatility?

A) The rupee may remain weak and tend to decline in value. There are two factors in the case of Rupee that are always relevant, trade and investment. Trading may not be such a determinant right now.

Therefore, the rupee moves along with investments. When FIIs bring in money or we get a good influx of FDIs, the Rupee appreciates and vice versa. Currently there is an outflow due to FII exit and the rupee is weaker.

Since it is an economy that is on the path of extensive and intensive growth, imports will outweigh exports until exports overtake imports in the longer run, which is why we need more dollars.

A weaker rupee invests exporters with currency gains and robs importers of their dollars. That is why, in a phase of currency weakening, the profit margins of export-oriented companies rise, provided they have not fully hedged the currency risk.

Q) The warlike scenario has wiped out a good 5-10% of the investor portfolio in just a few weeks. What advice would you like to give investors? Should one sit, add dips or cash out – what does history suggest?

A) The abrupt decline in the markets is the result of the war situation in Eastern Europe. Stocks collapsed and commodities skyrocketed.

As the war situation improves and the negotiations appear to be successful, markets should also recover from the fall.

At the same time, we should not lose sight of the fact that, even before the outbreak of the war, the market gradually corrected through the normalization of liquidity and the normalization of rates, and the continued sales by foreign investors.

This could continue to affect the markets until the liquidity normalization process grinds to a halt and market returns rise to near saturation levels.

In dips like we’ve seen so far, it’s good to top up existing investments as part of a long-term strategic positioning. In the medium to long term, the markets should align with economic fundamentals.

Q) With interest rates likely to move north – what’s the right strategy for MF investors? Should they look into adjusting their asset allocation?

A) There is currently no need to adjust the asset allocation. The base allocation can remain unchanged between major asset classes such as fixed income and equities, gold etc.

The movement in interest rates, or rather the rise in interest rates, has a negative effect on the whole spectrum of fixed income assets. At the moment it is more prudent to stay on the very short end of the curve, ie in products with short maturities.

The loss in value due to an increase in interest rates will be very small or marginal in this part of the curve.

Those already invested in short-term products can hold them because in a short-term bond portfolio, at least 20% of the portfolio matures within a one-year period, and the new investments will be made at the current yield, which will obviously be higher .

Also, portfolios invested in such funds may have made gains that provide the portfolio with some buffer to absorb some short-term pressure.

But the most important thing to do is to stay on the very short side. At the same time, one has to keep an eye on when the saturation of returns will occur to ensure timely access to long-term funds, although identifying this inflection point is not an easy task.

Q) Retail investors reaffirmed their confidence in equities amid volatility (geopolitics towards later part of the month) as equity funds saw a net increase of over Rs 19,000 Cr in February. What are your views and do you think this warlike scenario could result in a slowdown in flows?

A) Retail investors access the markets through Systematic Investment Plans (SIPs). Over the past decade, this method of investing has become popular as investors realized that long-term investing requires approaching the markets gradually and in phases.

They also know very well not to worry about the ups and downs and volatility in the markets. This will remain the main channel through which retail money will flow to markets.

However, it may not be correct to assume that investors will keep pumping money endlessly. They are also aware of the broad trends and sometimes they stop the SIPs.

This has happened in the past when a large number of SIPs were shut down when the market actually went into a bear grip. But they later restarted new SIPs as the markets stabilized.

The influx we are seeing today is a top level influx, and the average influx has been around Rs.9000 Crs monthly. Therefore, these inflows need not be understood as permanent flows, and we can see that the inflows converge to the mean levels over shorter periods of time. Longer periods of time will grow large.

Q) Crude Oil around $100 – what impact do you expect in the coming quarters on the markets, economy and India Inc.?

A) Crude oil is a major import item for India, which in dollars is equivalent to nearly a third of the country’s forex reserves. Therefore, any increase in the oil price will have a negative effect on the trade balance.

A larger deficit leads to a weak rupee, which in turn can fan the flames of inflation. Apart from fueling inflation, crude oil makes many things more expensive in the local market as it has an immediate impact on the prices of all major items, especially consumer goods.

High fuel prices depress economic growth by about 0.25% for every 10% increase in prices. Therefore, moving from $70 to $75 a barrel to about $95 to $100 a barrel could dampen aggregate demand and economic growth.

Q) Gold recently became the buyer’s favorite – what should your strategy be in case someone plans to put fresh money into the yellow metal? Should they buy physical gold or digital and why?

A) Gold investments for the portfolio are always a lucrative proposition. But exposure can be limited to 5 to 10%. The rest of the allocation should be in the traditional asset classes, such as equities and debt.

While investments can be made through gold funds and gold ETFs, one of the attractive options currently available is government gold bonds, which are issued by the RBI at regular intervals.

They pay an interest of 2.50% per annum, paid semi-annually, something not currently available with any other gold product.

Q) Are there any sectors that you think are running out of steam and investors should ideally be looking at making gains or shortening their positions?

A) Banking and financial services, IT, oil and gas are sectors that may not be negatively affected by high oil prices. That is why staying invested is a lucrative proposition.

Some of the other sectors that may be affected is because the high commodity prices can affect the ability of some companies to pass the higher prices on to the end users.

(Disclaimer: The opinions/suggestions/advice expressed here in this article are those of investment experts only. Zee Business encourages its readers to consult their investment advisors before making any financial decision.)

This post Dalal Street Voice: Joseph Thomas of Emkay Wealth decodes the reasons behind the fall of the rupee

was original published at “https://www.zeebiz.com/market-news/news-dalal-street-voice-joseph-thomas-of-emkay-wealth-decodes-reasons-behind-the-fall-in-the-rupee-181130”