Is it time to gradually add to US Tech exposure?

The market sold off sharply on Friday (26/08/2022)?with Nasdaq dropping 4% to 12,000 levels.?

It was surprising to see how “hawkish” Powell was, in his speech at Jacksonville symposium.

1. He?said that the Fed is not yet convinced that inflation has peaked, even though the core rate has been falling since March and he made it clear that the Fed will aggressively fight inflation no matter how long it takes.
2. He also mentioned that “Restoring price stability will likely require maintaining a restrictive policy stance for some time,”.?
3. Further, drawing upon experiences in 1980’s, he pointed out that “The historical record cautions strongly against prematurely loosening policy.

Our take on US Inflation!

The most important aspect that determines inflation is inflationary expectations. The longer the current bout of high inflation sustains, the greater the chance that expectations of higher inflation will become entrenched in consumers and companies, leading to inflation and inflationary expectations feed upon each other, leading to self reinforcing cycle.

We feel inflation will inch down over the next 6 to 9 months in a meaningful manner, due to several factors outlined below:

1. Firstly, the FED is completely committed to fighting inflation and is doing all the right things by being hawkish and maintaining very tight financial conditions.
2. Secondly, while FED delayed acting at initial stages, when inflation started rising sharply in April 2021 by ascribing it to transitory factors, the delay was limited to 9 months only, unlike the 1980’s when high inflation sustained for very long duration. In the current context as high inflation has been there for limited duration of 15 months only, it may not have got completely entrenched in people’s mind.
3. We also feel that COVID/Ukraine war related supply chain disruptions will ease going forward
4. Many of the advanced indicators such as home prices, commodity prices, crude oil, etc are already showing signs of easing in US.

What about Recession?

As long as inflation comes down over the next 6 to 9 months, the impact of recession will be limited, as FED will be in a position to stimulate the economy to come out of the recession.

The situation to fear is, if economy goes into a recession and yet inflation does not come down.

Our Recommendation

We feel inflation in US has peaked and with FED completely committed to inflation fighting, we expect it to gradually inch down somewhat faster than what the market expects.?

In view of the above, we feel any sell off to NASDAQ 12,000 or lower levels, is a good time to gradually increase exposure to the various US Tech segments such as the Mega Caps, Semiconductors, Cloud & Consumer Internet companies.

In our opinion, odds are extremely high that?the previous low will not be breached.