The cause and effect may sound strange. But to market veteran Andrew Holland, lack of waiters at American restaurants is a lead indicator of how consumer spending-led inflation may stay high. That belies the expectations of a sharp downtick in the pace of price rise, a hope that has triggered an equity rebound.
“In the very short term, the markets are overbought,” said Holland, chief executive officer at Avendus Capital Public Markets Alternate Strategies. “The markets were blindsided into believing that the Fed will go into a pause mode. And we were in the same camp. But we have changed our view now.”
India’s benchmark Nifty 50 has recovered more than 14% since June lows as foreign investors turned net buyers after nine months in July, and continue to pile into domestic stocks in August. The Nifty 50 closed at 17,491 on Monday.
Holland is bearish at the current levels, citing that the markets have the potential to correct at least 5-7%, and maybe even go all the way to 16,000. His fund, India’s largest category III alternate investment fund, is sitting on 50% cash, and the remaining long bets are fully hedged to protect from downside risk.
The risks are tilted towards the downside, he said. This is a bear market rally, and the belief that a soft-landing may be possible is not his base case, he said.
According to Holland, it’s a buy-the-dip market and levels of about 16,000 give the comfort in valuations to play long for a possible downtick in inflation in 2023. Rate-sensitive sectors like banking and real estate, which have been large movers in the current rally, might correct on the way down, Holland said. Technology can be a good hiding place but Holland is circumspect on the demand drivers for Indian IT firms, he said.
“Most sections of the market have not been through an actual recession or high inflation, and that is another factor the markets will have to grapple with, because it can be very painful,” he said. India has seen some periods of very high inflation but it’s an alien concept to the western world and that may prove to be a testing phase for them, Holland said.