Investors on Dalal Street may move away from the uncertain returns of the equity market back to the certain returns of fixed deposits amid the rising interest rate scenario in 2023, said Siddhartha Bhaiya, MD, Aequitas Investment Consultancy. His views came at the time when the benchmark equity index NSE Nifty index cracked over 1 per cent to 17,859.45 on January 6, 2023 against 18,105.30 on December 30, 2022. However, the index wiped out most of its losses of the last week and traded 200 points higher at the 18,050 mark in the afternoon trade on January 9.
In an interaction with Business Today, the market watcher explained that whenever interest rates have hardened the valuations of companies have suffered – especially ones which are in the high price-to-earnings zone. Higher cost of funds brings down the profitability of companies which have debt–so companies tend to have lower profits.
The Reserve Bank of India (RBI) has increased the repo rate by 225 basis points since May 2022 to 6.25 per cent. On the other hand, the US Federal Reserve hiked interest rates by 425 basis points to 4.25 per cent-4.50 per cent.
While sharing the impact of rising interest rates, Bhaiya further added that the higher cost of funds also brings down the ability of consumers to keep on with their spending. Therefore, companies tend to have slower growth in sales.
“Rising costs of funds also increase the cost of taking levered bets on the markets. This brings down the number of potential investors in the market,” he said adding there are a lot of slow-growing companies which are trading at high valuations in the Nifty, where most of the money is invested, investors may have a difficult time making money using the same formula that has worked earlier.
“We have always had the central banks across the world coming to the aid of the equity markets, but this time the central banks are the ones who are engineering the slowdown due to the excessive printing that happened during Coivd-so even when markets are soft the central banks support will not be there,” Bhaiya added.
Data available with ACE Equity showed that the price of earnings (P/E) ratio of over 250 companies in the BSE 500 index are hovering above their respective 5-year average.
Considering the present market situation, the market watcher said that there are still various pockets in the market where companies will do well. “We are seeing investments happening in specific areas which are resulting in good growth for companies in sectors like – infrastructure, B2B manufacturing, auto and media, among others,” he said.
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