Dr. Joseph Thomas, Head of Research, Emkay Wealth Management said that the Rupee may remain weak and may tend to depreciate. There are two factors in the case of Rupee that are always relevant, trade and investments. Trade may not be a very determinant factor at present.

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Prior to Emkay, Joseph was associated with the Aditya Birla Group for almost 12 years as Head of Institutional Sales, and as Head- Investment Research & Advisory, in Aditya Birla Money and Aditya Birla Money Mart.

In an interview with Zeebiz's Kshitij Anand, Thomas said that a weaker Rupee invests exporters with currency gain and whereas it robs the importers of their dollars. Edited excerpts:

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

A) The BJP win in the three states at the face of it means that there is general acceptance of the policies and programs of the government by a large section of the population.

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

The after effect of the result is continuity in government and the policies. For the broader economy and markets, this may not be as important as it is with a national election as all the major policies and programs come from the central government and the national institutions.

The electoral victory and the continuity is achieved in the face of persistently high inflation, spiraling fuel prices, and inadequate job creation, is something that is comforting for the ruling party.      

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Q) What is your take on the rupee? Which sectors could get impacted the most from recent volatility?

A) The Rupee may remain weak and may tend to depreciate. There are two factors in the case of Rupee that are always relevant, trade and investments. Trade may not be a very determinant factor at present.

Therefore, the Rupee moves with investments. When FIIs bring in money or we get good inflows from FDIs, the Rupee appreciates and vice versa. Currently, there is outflow on account of FII exit, and the Rupee is weaker.

Being an economy, which is on the path of extensive and intensive growth the imports will be heavier compared to exports, till exports catch up with imports over the longer term, and therefore, we need more dollars.

A weaker Rupee invests exporters with currency gain and whereas it robs the importers of their dollars. That is why in a phase of weakening currency, the profit margins of export-oriented firms rise, provided they have not hedged the forex risk fully.              

Q) The war-like scenario have wiped out a good 5-10% of investor portfolio in a matter of weeks. What advice would you like to give to investors? Should one stay put, add on dips or cash out – what does the history suggest?

A) The abrupt fall in the markets has been the product of the war situation in Eastern Europe. Stocks nose-dived and commodities shot up.

As the war situation improves and negotiations seem to become successful, the markets would also start recovering 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 was gradually correcting due to the normalization of liquidity and normalization of rates, and the persistent selling by overseas investors.

This may continue to affect the markets till the liquidity normalization process comes to a halt, and as market yields rise to near saturation levels.

In dips like what we have seen so far, it will be good to add to the existing investments as part of a long- term strategic positioning.  Over the medium to long term, markets would find alignment with economic fundamentals.              

Q) With interest rates likely to head North – what is the right strategy for MF investors? Should they look at tweaking their asset allocation?

A) There is no need to tweak asset allocation at this juncture. The basic allocation may remain unchanged, between the major asset classes like fixed income and equities, gold etc.

The movement in interest rates or rather the rise in interest rates affects the entire spectrum of fixed income assets adversely. The more prudent thing at this time is to stay at the very short end of the curve, that is, in short maturity products.

The loss of value on account of a rise in interest rates will be very small or marginal in this part of the curve.

Those who are already invested in short-term products may hold it because, in a short-term bond portfolio, at least 20% of the portfolio will be maturing within one year time period, and the fresh investments will be done at the ongoing yields, which obviously will be higher.

Also, portfolios invested into such funds may have accrued gains that give the portfolio some cushion to absorb some short-term pressures.

But, the key thing to do is to stay at the very short end. At the same time, one should keep an eye on when the saturation in yields are going to happen to ensure timely entry into long-duration funds, though it is not an easy task to identify this inflection point.    

Q) Retail investors reaffirmed their faith in equities amid volatility (geopolitical towards later part of the month) as equity funds saw net increase of more than Rs 19000 Cr in Feb. What are your views, and do you think this war-like scenario could result in a slowdown in the flows?

A) Retail investors are accessing the markets through Systematic Investment Plans (SIPs). In the last decade, this mode of investing has become popular as investors realised that long-term investing requires approaching the markets in a gradual and phased manner.

Also, they know very well that there is no need to worry about the ups and downs and volatility in the markets. This will continue to be the main channel through which retail money will flow into the markets.

However, it may not be proper to take it for granted that investors will continue to pour in money endlessly. They are also aware of the broad trends and sometimes they may stop the SIPs.

This has happened in the past when a large number of SIPs were stopped when the market actually fell into a bear grip. But, they restarted fresh SIPs later as the markets stabilised.

The inflows which we see today are peak level inflows, and the average inflows were around Rs.9000 Crs on a monthly basis. Therefore, these inflows need not be construed as permanent flows, and we may see the inflows converging to the average levels over shorter time periods. Longer time periods, is set to grow big.  

Q) Crude around $100 – what is the kind of impact you foresee on markets, economy and India Inc. in upcoming quarters?

A) Crude is a major item of import for India which in dollar terms is equivalent to almost a third of the forex reserves of the country. Therefore, any surge in oil prices will adversely affect the trade balance.

Widening deficit leads to a weak Rupee which in turn may fan the flames of inflation. Apart from fuelling inflation, crude makes a lot of things more expensive in the local market, as it has an immediate impact on prices of all major articles especially articles of consumption.

High fuel prices pulls down economic growth by about 0.25 % for every 10% rise in the prices. Therefore, the movement from US$ 70-US$ 75 per barrel to around US$ 95 – US$ 100 per barrel, may have a dampening effect on aggregate demand and economic growth            

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

A) Gold investments for the portfolio is always a lucrative proposition. But the exposure may be restricted to anything from 5 % to 10%. The rest of the allocation should be in the traditional asset classes like equities and debt.

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

They pay an interest of 2.50 % per annum, paid semi-annually, something that is not available from any other gold product at present.        

Q) Are there any sectors that you think have run out of steam and investors should ideally look at booking profits or trimming their positions?

A) Banking and financial services, IT, Oil, and Gas, are sectors that may not be impacted by high oil prices negatively. Therefore, remaining invested is a lucrative proposition.

Some of the other sectors that may be impacted is because the high commodity prices may have a bearing on the ability of some of the companies to pass on the higher prices to the final consumers.  

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)