In the present era of globalisation, markets are very highly correlated and especially with the USA, the largest economy. If we analyse S & P 500 and Nifty 50, they generally move in tandem. Infrequently, this correlation breaks down, generally in the favour of the USA where it might be going up while the Indian market might languish. This time around, it is possible that correlation if it lessens, might favour India.
Important reason is that inflationary fears in India are not as high as in USA. The expectation is that inflation in India might moderate in a couple of quarters. Therefore the interest rate hikes by RBI might not be as sharp as in the USA. Indian economy is still expected to grow by 7.2 % in FY 2022-23 and could again be the fastest large economy in the world.
A soft landing for USA might be the best scenario for India since it is the biggest importer and Indian exports can continue to do well. At the same time, if the big guzzler guzzles less, it could soften the currently elevated prices of commodities, especially Oil which will be a good development for India.
There are multiple structural factors favouring the Indian economy and we remain bullish on Indian equities in the medium term in spite of the current volatility and noise in the markets. Scheme and sectoral allocations have to be done carefully. Domestic economy facing sectors are likely to perform better and valuations have corrected significantly across sectors. Banking stocks are attractive because of mending of their balance sheets, pick up in credit growth and good earnings visibility. Industrials and capital goods are likely to do well because of PLI incentives and emphasis on infrastructure development. IT services stocks have corrected, they are likely to grow well in the next 3-5 years and entry levels after the correction are good.
For Debt as an asset class, interest rates are slightly higher. We continue to recommend short term debt schemes investing in high credit quality securities and that is the best strategy given the strong fluctuations and volatility in bond yields.