First 3 months after Fed rate hike may be very volatile

Independent market expert Ajay Bagga says that as the rate hike cycle starts, the first three months are very volatile but on a 12-month basis the markets on an average return anything from 10 to 13%. Edited excerpts from an interview:

Are you attributing the sell-off on Dalal Street to global factors?
The biggest issue now will be the March Fed rate hike. The markets are psyching themselves for it. If you see the movement in the US 10-year treasury after 1992, this is the biggest move that has happened in the first 10 trading days. Normally as the rate hike cycle starts, the first three months are very volatile but on a 12-month basis the markets on an average return anything from 10 to 13%.

FIIs have been heavy sellers for various reasons. FII outflows are happening across emerging markets and we will also get caught in that.

On the domestic front, Budget expectations would have seen the market rallying but we have a very big event in terms of the Fed meet on Jan 25-26. We are expecting some clarity from the Fed on the March rate hike and on the balance sheet normalisation which they have been talking about. The bond markets are already discounting that but the good news is that normally it leads to three months of volatility and markets rally after that. Rate hikes come in at a time when the economies are doing well. So that is the good news.

Domestically, earnings of which companies are to be watched out for?
The numbers are on par with expectations, but the margins are getting squeezed. We already know the numbers are very dismal for autos. The only good spots are banks, select textiles and select IT companies. Oil and gas will also do well. Energy does very well normally in an inflation scenario. Our calculation show that energy tends to outperform the broader market. Globally also, a lot of money is going into energy ETFs because energy tends to outperform in a high inflation scenario. But the high oil price, inflation and global tightening by central banks, especially the Fed rate hike, is causing volatility.