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Federal Reserve's office at Washigton DC, in the US. (Photo credit: Freepik)

The big event of Fed policy is over. Usually, when the event is in-line with market forecast, it finds some relief. But this time it has bought more spookiness to the market. The market was contemplating a hike of 50bps, which increased to 75bps by the end of the day. Commentary hints of more hawkish steps like a 50bps hike in the next policy. Surely this will slow down the economy and downgrade future corporate earnings, leading to further fall of the market. Such a volatile market can be expected for a period of next 2 to 9months. Because there is lack of clarity about how much more this aggressive policy will continue leading to further slowdown of economy into a mild or severe recession.

During the correction of last 7months, the valuation of broad market has fallen around the long-term averages, keeping scope for further correction. FIIs selling is increasing in emerging markets and funds are shifting to safe classes with an appreciation to dollar. This can continue till the market is able to fully factor the peak of aggressive monetary policy.

An assessment of FOMC statement shows a forecast of FED rate at 3.5% in December 2022 and then increasing to 4% in H12023 before reducing to 3.5% by Dec2023. Current effective rate after this week’s hike is 1.75%, showcasing another 75bps hikes in the next 4 policies, to be conducted on July, September, November & December, in 2022. If the Fed maintains the hawkish strategy in July, the possibility of later rate hike will moderate. In H1’CY23 we can expect a total hike of 50bps, reducing the possibility of hawkish rate hike in H2’CY23. As market factors this phase of rate hike in bond yields, we can presume that we are in the last phase of consolidation, which can end during the year. US10yr yield had peaked to 3.5% and currently stays at 3.2%, can increase to 4% to 4.5% in the future, depending on developments.

We feel that faster the rate hike strategy of central banks, lower will be the time span of market correction. Though correction may be high on daily basis, but good for investors. Now RBI will also have to enhance its monetary policy to maintain the gap between Fed & Repo rate else INR currency will have a negative impact. This will mostly affect leveraged stocks, cyclicals and capex-based industries like Metals, Mining, Cement, Industrial & Telecom.

We should also consider that a quick & strong development, which leads to a halt in Russia-Ukraine war and re-opening of Chinese economy can bring a break to the hawkish policy. It may be early to state, but we will realize the benefits during the year as war has slowdown & Covid cases have reduced. For India, the biggest boon will be a stoppage of FIIs selling, which is the main cause of ongoing corrections. It is possible if the global inflation starts to breakdown, supported by both the factors leading to fall in commodity prices & opening supply.

The correction of global markets is due to double whammy of policy rate hikes and cuts in central bank’s balance sheet. We may continue to trade with high volatility, however on a medium to long-term basis this could be an opportunity in disguise. Especially for a risk taker, who can start investing new money above the regular amount on a consistent basis over a period of next 3 to 9 months.