Market not ready for escalation in Iran-Israel conflict; US focus on West Asia may delay tariff deadline: Aman Chowhan

Economic Times

15 hours ago

Aman Chowhan, Fund Manager, Abakkus Asset, says since January, a wait-and-see approach has been adopted due to market uncertainty. The upcoming July 9th deadline for tariff discussions with the US is a key date to watch. However, progress has been slow, and the US's focus on the Middle East could further delay the deadline, potentially having a neutral impact on the market. Next quarter onwards, we will see some improvement coming in. Autos, housing can definitely be considered. Discretionary is not something to link with real interest rates. So, autos and real estate would be two big sectors if somebody was to play the rate sensitives.
Let us start with the news point on the ripple in the Middle East. Should we be worried about it? Could this extend itself into what is looking manageable on Monday? Could it become ugly? And if it becomes ugly, are markets prepared for it?
Aman Chowhan: I do not think markets are prepared for it and are still taking it lightly. What has happened in the last year-and-a-half is that there have been some issues like this and during the recent geopolitical issue involving India-Pakistan confrontation, people bought on the dips and that has worked for them. The same thing is happening here. We all hope that the Iran-Israel conflict will not escalate, but if it escalates, I do not think the market is prepared for it. We can see a deeper correction if things go out of hand or get ugly.
At this current juncture, how would you map the risk-reward ratio? There is a new risk-on on the horizon. But in general, markets have been in a steady shape. The tariff fear is over. RBI is delighted. Macros are looking okay. In general, is the risk-reward ratio barring what has happened over the weekend with the US joining the Iran-Israel conflict still favourable?
Aman Chowhan: Selectively favourable. What is favourable for us is that RBI has done great and relatively India is doing better, things are improving, growth rates are picking up. But globally, there is this uncertainty and if things get ugly, the global demand can take a hit. If the global demand takes a hit, then global equity markets will correct and then we will relatively outperform, but we will also correct. If tomorrow the US markets are going to correct 10%, we will be down 5-6%. So, relatively, we will be better off, but not on an absolute basis. That is what the risk is. We are doing fine. Had the Nifty been around 20,000, 22,000 levels, I would have said the risk-reward ratio is favourable. Even if things get ugly, there is not much to lose, but now Nifty valuations are not great and we can say that there is a little downside. There can be a 10%, 15% 20% stock selective draw down if things get ugly globally.
Given the global backdrop and the little bit of a correction that we have seen, would you be an aggressive buyer or seller or would you just adopt a wait-and-watch approach?
Aman Chowhan: Frankly, we have not been aggressive in either buy or sell and this is the stance since January. Specifically in Jan-Feb, we thought if we would act, it would be more of an emotional decision than a rational decision. The same thing is happening now. There is absolutely no way, you can pinpoint as to whether things are going to get ugly or not and hence you cannot be aggressive on either side. We are not being aggressive sellers, but not buyers as well. So, more or less you can wait and watch.
Give us some sense what could be the next big cue for the markets apart from the current geopolitical situation because we are done with the RBI policy, and the earnings season? The next big trigger or rather the dates that everybody is watching out for is 9th July. Help us understand with respect to that deadline, how are the markets placed and what sort of a buildup are we seeing in the global versus Indian markets?
Aman Chowhan: I think markets are positioning in that and there will be some announcement ahead of the 9th July deadline and there will be countries which will be getting into concrete tariff discussion with the US and conclude on that. The risk there is things can get delayed. The way things are right now, there is not much progress that we have seen selectively with respect to various countries that are now negotiating with the US. I believe the US also has got distracted in the Middle East. So, there can be a further push back to the deadline and that should be neutral for the market I would believe. What is your view on the chemical space given that it is Iran's biggest export to India. What are you making of this sector?
Aman Chowhan: We have a positive view on chemicals and not just because of Iran, it is also because chemical prices have stabilised globally and the oversupply that we were seeing from China is now behind us and that is where we feel India can really pick up. Post IT and pharma, chemicals have been doing well for the last few years, and this can be a real long-term good opportunity for India to gain market share out of China. We have a pretty positive view on chemicals, especially from these levels. The last two years have been tough for them, but now both specialty as well as chemicals are looking attractive. There is a big change from RBI. Liquidity has come back, rates have gone down much faster than we anticipated in terms of the glide path. When will that start reflecting in earnings? Will it be in this quarter? Will it be next quarter, and does it make sense now to buy rate sensitive not just financials but, autos, or for that matter discretionary or white goods?
Aman Chowhan: Not this quarter, next quarter onwards you will tend to see some improvement coming in. Autos, housing can definitely be considered. Discretionary, I do not think is something to link with real interest rates. So, autos and real estate would be two big sectors if somebody was to play the rate sensitives.
Are you parking the fresh inflows which you are getting in your schemes – AIF or portfolio management – in cash hoping for better entry levels or are you still open to investing in your existing portfolio? What has been the strategy because a lot of mutual funds, of late, are raising a lot of cash. There are schemes which are sitting on 20-20% cash now.
Aman Chowhan: We would have high single digit to low double digit kind of cash levels. This is not something that we have strategically created; it is just that we are taking slightly longer time to deploy the inflow that comes in. If somebody comes in today, 50-60% of that will be deployed in the next one week and then we will wait out for the balance and depending on how the global situation pans out. So, that is building up the cash overall in this scheme, but it is not that we have created specific cash in the portfolio.
What is the best strategy for the investors right now? The reason I ask this is because two months back, when we interacted with you, the markets were correcting indeed and you told us to go ahead investing in the markets in a staggered manner, but not to rush into the markets given so many moving parts. Now that the markets have rallied, what is the best approach?
Aman Chowhan: Investors should wait out. They should wait out for at least a month or so to see how the global events pan out. It is not just the geopolitical, it is also the tariffs. Let us not forget that even right now there is a 10% blanket tariff and that is going to have some impact on demand in the US, especially considering that the dollar has not appreciated. In fact, as we see today, the dollar is lower than what it was when Trump came in. So, they also have to take the impact of a depreciating dollar plus, the 10% tariff which is already there, so it is not just geopolitical, it is also the tariff and hence I would suggest maybe wait out for a month or so, see how things pan out before jumping in.
Whatever could go wrong has happened over the weekend. Technically whatever could go wrong has got fixed, tariff concerns, dollar FII flows, Are we really nearing that peak of good news in theory?
Aman Chowhan: We do not know. The tariffs happened the same way. We all were thinking what Trump would do, but there was going to be a retaliation tariff which many countries did, and the same thing can happen on the geopolitical front. So, there can be some retaliation. We hope that should not be the case, but that is the risk in the market today. On one hand, we know that the US or Israel or for that matter whoever has to act has already acted, but there can be retaliation and even though it is a small retaliation or an attempt at retaliation also in markets might be not prepared for that, I feel.