US Fed Rate Hike Status Quo & Post Equity Investment Tips

What should be your investment theme post the Fed status quo…

The Fed decision to maintain the status quo on rates was received with celebratory applause by global markets. Indian markets (Nifty) crossed the 8000 mark although it finally closed below that psychological mark. The Fed decision to maintain status quo has opened up a new approach to investing in Indian equities.

Ideally, investors need to adopt a 3 pronged approach to equity investing. There is the very short term approach with a 2-3 months perspective. Then, there is a medium term approach from 6-12 months perspective. And finally, there is the long term approach from 1-3 years perspective. So how do you calibrate this strategy.

For the very short term…

There really is no rocket science in that. A Fed status quo means that rates are unlikely to be hiked at least till December or possibly even beyond that. If the Fed is not hiking rates, then the RBI may have sufficient reasons to cut rates in India. While the quantum of cut varies from 50-75 basis points, the fact remains that the RBI is closer to a rate cut than any time in the recent past.

A rate cut would typically make banks and interest rate sensitive stocks attractive. Banks would gain substantially on their treasury portfolio by a rate cut as they will be able to book profits on their debt holdings. Two wheelers and auto companies that focus on rural and industry demand will also benefit from lower rates. And of course, real estate stocks could be a major beneficiary of lower rates. Of course, you need to stick to real estate companies that have been making an earnest attempt to reduce debt and those that do not have too much foreign debt on their books.

For the medium term…

The Fed decision to maintain status quo is a clear indication that global growth is not picking up. That is not great news for capital goods and metals companies that depend largely on an economic turnaround. Additionally infrastructure companies will also lose out in the medium term due to slackness in demand.

For the long term…

One thing is very clear that the US dollar is on an upward trajectory. That will obviously benefit companies from the pharmaceutical and IT pack that are most likely to benefit from a strong dollar. That will continue to outperform in the long term portfolios.

But a word of caution, here! A strong dollar will be negative for companies with large dollar debt in their books. One needs to be cautious of these companies. And if the exposure is un-hedged, there could be trouble! ©

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