SynopsisMarkets have been knocked back to reality following a tenacious bull run and in the process are in the midst of a host of uncertainties. In this piece, we take a look at the recent developments, their potential impact on the economy and investments, and how best investors can manage the situation, including stock picks from prominent brokerage houses.
Following roughly two years of robust gains, equity markets have been knocked back to reality over the past few months. Newer market entrants got a taste of sharp volatility as investors worldwide tracked developments including Covid-19, geopolitical strifes, inflation & taper plans.
In this piece, we take a look at the recent developments, their potential impact on the economy and investments, and how best investors can manage the situation.
Feast to Famine
To borrow the words of noted economist Mohamed A El-Erian, emerging markets, including the likes of India have faced somewhat of a ‘feast to famine’ situation when it comes to equity markets and foreign investments. Take India for example. India was one of the top-performing markets among the large countries in 2021.
A look at Nifty 50’s performance since the pandemic broke out in India in March 2020
In a record bull rally, the broader markets managed to register unprecedented gains. But as inflation began spiraling out of control, valuations became expensive & a central bank taper was forecast, foreign brokerages called time on India. Thus began the foreign institutional investors’ (FIIs) exodus.
The latest data shows that the outflow in the previous month was the highest since March 2020, when the COVID pandemic broke out. Net, the FIIs have sold more than Rs 2.5 lakh crore worth of shares in the current financial year ending this month.
While the FIIs have continued offloading their holdings in Indian bourses for the sixth month in a row, the domestic counterparts (DIIs) have shown ample resilience. DIIs have pumped Rs 1.42 lakh crore into equity space over the last six months.
Data from the Association of Mutual Funds in India (AMFI) shows that individual investors pumped money into equity schemes in February for the 12th straight month, a testament to the belief of domestic investors in the face of rising uncertainties.
Image source: Axis Securities
COVID, all but gone?
Following a short Omicron-led spike, threats due to Covid have diminished to a large extent. Vaccination rates picked up & the caseloads have reduced considerably, which encourages the thought that another clampdown by authorities in activities may not be on the horizon. Breakout of another wave of Covid-19 was among the top worries of analysts and economists and the threat seems to have subsided.
As per an Indian government’s estimate, more than 75% of India’s adult population is now fully vaccinated and 95% have received their first dosage.
Enter: Vladimir Putin
Russian President Vladimir Putin in late February launched a ‘military operation’ into Ukraine and all hell broke loose. In what has now turned into a humanitarian crisis, it also upended markets globally and provoked severe volatility, unleashing worrying uncertainties for a world economy barely recovering from the damage caused by the pandemic.
Russia & Ukraine are major players in the exports of certain commodities-59% of global sunflower oil exports, 36% of global iron or non-alloy steel exports, and 26% of global wheat exports.
Russia and Ukraine also lead global production of metals such as aluminum, nickel, copper, and iron ore, and this geopolitical strife has meant that prices of these commodities have skyrocketed. While aluminium is trading at a record high, prices of palladium have shot up 80% over the last two months.
More worryingly, prices of Brent crude have fluctuated by the most on record this week, even touching a 14-year-high of over $140 per barrel. This is a point of bother for India because it imports 85% of crude and any such move is certain to have a ubiquitous impact on the Indian economy as a whole.
In a study conducted in October 2021, the Reserve Bank of India had said that a 10% hike in crude oil prices leads to a 30 bps jump in domestic inflation (including direct and indirect impacts).
Where does India stand?
As things stand, there seems to be no end in sight when it comes to Russia-Ukraine. Owing to the surge in prices of crude oil India’s current account deficit (CAD) may expand, inflation may inch up further (after having only recently hit the upper limit of the MPC’s tolerance band), eventually leading to slower economic growth.
Image source: Motilal Oswal in a note to investors
In a recent whitepaper, Dun & Bradstreet highlighted that a war like this stands to have a wide-ranging impact. “If the conflict continues, the availability of critical raw materials such as natural gas, crude oil, metals, and agri-commodities would be jeopardized and transportation costs would increase. Gas is essential to transportation, therefore energy disruptions will cause industry-wide consequences,” it said.
The Reserve Bank of India now has a tough task at hand as rates have been held at a record low while inflation has slowly crept up.
Return of the old guard
Among the asset classes, good-old gold has emerged as the top-performing asset in the initial months of 2022. The safe-haven metal, a proven hedge against inflation, may just be the preferred asset class till the current uncertainties don’t subside.
In a note earlier this week, investment bank Goldman Sachs upgraded its targets on gold. It now expects all three major components of gold demand to increase strongly in 2022.
Axis Securities in a note to investors said that gold will be the preferred asset class of 2022 and has recommended a ‘buy-on-dips’ strategy.
India as an investment destination
In the face of rising inflationary pressures, taper forecasts in place by the US Federal Reserve, geopolitical uncertainties, analysts have advised staying invested in the long haul.
Axis Securities has continued with its bullish stance on equities, with an ‘overweight’ call on the asset class. In a note, it said that this is the right time for investors to review their portfolio and recalibrate it with the initial target allocation to bring down the overall portfolio risk.
“Investors should focus on asset allocation and use this volatility to build long-term positions in quality companies. In the current environment, investment strategy should focus on fundamentals and with the long-term story for the Indian market continuing to be intact, we advise staying invested in the market for the long haul,” the note read.
Sectorally, commodities are well poised for gains in the current situation and prices may continue to rally. Brokerage firm Motilal Oswal in a recent note to its investors noted that metals and oil & gas have gained due to the rising prices, while indirect beneficiaries include export-oriented sectors (specifically IT– benefitting from ₹ depreciation) and non-crude linked sectors.
But on the flipside, autos, consumer, consumer durables and cement have been the most adversely impacted sectors due to the spike in commodity and energy prices. The impact on gross margins for these sectors would be substantial, the firm said.
However, in an interview with ET’s Sanam Mirchandani, Sanjay Mookim, India strategist and head of equity research at JP Morgan India flagged that India is vulnerable to this upward movement in oil prices, and as such, weights on Indian equities has not been increased.
“As a growth market, valuations in India can also come under pressure from rising rates. Indian equities have tended to underperform emerging markets historically in periods of high oil prices. Market valuations are still higher than pre-pandemic levels,” Mookim said.
Largecaps: Infosys, ICICI Bank, HDFC, SBI, HCL Tech, L&T, Tata Motors, HDFC Life, Dabur India, Godrej Cons, Apollo Hosp, Macrotech
Mid & Smallcaps: Canara Bank, Jubilant Food, SAIL, Ashok Leyland, Dalmia Bhar, Zee Ent, Whirlpool India, ICICI Sec, GR Infra, Zensar, Mahanagar Gas, Transport Corp
Image source: Morgan Stanley
ICICI Bank, Bajaj Auto, Tech Mahindra, Maruti Suzuki India, State Bank of India, Hindalco Industries, Bharti Airtel, Federal Bank, Varun Beverages, Ashok Leyland, National Aluminium Company, Bata India, Krishna Institute of Medical Sciences, Equitas Small Finance Bank, Praj Industries, CCL Products (India)
(Originally published on Mar 12, 2022, 10:11 AM IST)
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