Oasis In The Middle Of A Continuing Sandstorm

Sanjiv Mehta  |  2022-10-10

Indian market closed at the level of 17094 (Nifty 50 Index) on Sep 30, 2022, about 3% lower than the close of the previous month. It has outperformed most of the other global markets which are either at their 52-week lows or even lower while the Indian market is 14% higher than the lowest during this period.

India continues to have strong macroeconomic credentials. In the recent statement by the RBI Governor, where he announced the raising of the Repo Rate to 5.9%, he also mentioned that the economic growth is expected to be 7% in FY23 and 7.3 % in Q1FY24. Inflation numbers for the same periods are expected to be at 6.7 % and 5 %. Earnings growth is expected to retain its strong momentum. Other indicators like GST collections continue to be at good levels.

One commentator compared India to an Oasis and the global conditions to a severe sandstorm. Some sand is bound to get deposited in the Oasis too and therefore examining global events involving multiple countries becomes important.

The USA showed strong economic numbers last month, increasing expectations of aggressive rate hikes. Fed expectedly in its Sep 2022 FOMC meeting raised the rates by 75 basis points and the stock markets tumbled across the world. The Indian market also showed a sharp correction. USA 2-year yields went up to 4.4% implying a higher expectation of a Fed Fund terminal rate of 5.5%.

Russia Ukraine war is becoming more equal and there is a concern that a desperate Russia can be dangerous. Some observers have also started talking about the nuclear threat but so far, the financial markets have not taken it seriously. Liz Truss, the new prime minister of the United Kingdom, started her journey on a turbulent note by taking a sharp U-turn on cutting taxes for the rich.

Its currency and the bond markets had suffered when the unfunded tax cuts were announced.  However, she is trying to retain her firm resolve credentials by continuing to deny permission to King Charles from attending his favourite COP27 climate change summit.

Australian Reserve Bank raised interest rates only by 25 basis points giving rise to hopes that the hawkishness of other central banks might decrease too but the Australian economy is more correlated to the Chinese economy and has weak consumer spending. OPEC is cutting down its oil supply to support oil prices at a relatively high level.

In the USA also, during the last few days, some rumblings have started that Pivot will eventually arrive, unlike Godot in Samuel Beckett’s play. Bureau of Labor Statistics JOLTS job vacancy numbers for the US dropped very sharply last month.  But the “quit rate” — the proportion of workers voluntarily leaving their jobs — is still extremely high by historical standards, and didn’t decline last month. The number of job openings per unemployed worker is nearly 1.7, well above pre-pandemic readings of around 1.2. That suggests the Fed will need more evidence before altering its stance.

October 7, 2022, NFP & employment numbers were also on the stronger side. Success in the Fed’s economic battle against inflation will happen only in fits and starts, and the withdrawal of tight monetary policy in response will also likely be gradual. The probability of a Pivot, therefore, is less though a Pause might emerge at some stage. Inflation might remain entrenched for some more time.

By and large, global uncertainty is likely to persist for the next few months.  For India, risks are high oil prices, continued aggressive tightening by Fed, less decoupling, expensive valuations, and heightened external risk.

Considering all the above developments, our current view is that the medium term for India is bullish though downside risk remains high because of the continuing sandstorm. Though we continue to recommend significant equity allocation for goals with a time horizon of more than 4 years, expressing it appropriately with good sector selection, mostly domestic economy oriented, is crucial. Money should mainly be invested in well-chosen high-quality diversified equity schemes. Additionally, the banking sector, given its valuations and the current economic cycle stage, is attractive.

The infrastructure and defense sectors are also likely to perform well because of the government’s sustained push and spending. A new CAPEX cycle might be emerging and will be good for industrial, engineering, industrial automation, and logistics companies. Domestic consumption is a good story and will favor autos, hotels, and discretionary consumer spending stocks.  In view of continuing uncertain global macros, it is important to maintain good amounts in your liquidity and contingency fund. Those should be in ultra-short-termdebt funds in the current scenario of rising and volatile interest rates.