Equities Looks Set to Turn a New Leaf

The many pains which enveloped the equity markets seems to be waning although at a sluggish pace. The obvious factors that triggered a fall in the markets were the uncertainties around the economy and the markets. These uncertainties were due to high commodity prices, the trajectory of inflation, the liquidity normalization policies of the central banks, and finally, the rate action from central banks especially the Fed and the RBI. But recently the commodity prices have softened and even Brent has moved down. Global commodity Index is down by 23 % from the peak seen three months back. And this offers some hope based on numbers that inflation would also soon most likely peak out. If inflation moderates or peaks out, then future central bank action would also moderate gradually, and the fears of rapidly rising rates would be contained to a large extent. The aggressive rate action by Fed has been of benefit to the global economy in two ways. One, it will help smoothen the price level in the US itself, and two it has helped the US Dollar to be stronger against other currency majors. Strong Dollar almost always pulls down commodity prices and this will keep commodity prices under check. As far as oil is concerned, the prices may remain in ranges but with an upward bias, except for any changes that may happen in the geopolitical terrain.

While there is a case for lot of improvements in the economy and markets from all these favourable developments, what should help a discerning investor is the fact that the real GDP growth for India is expected to be in the range of 6 to 7 % in the current year, compared to China which is slated to grow at less than 5 %, and the US close to 2.50 %. This puts the Indian economy in the lead with the global growth at just 3.25 %. What spurs earnings growth is GDP growth. The index valuations look more reasonable, compared to what it was about three months back with valuations close to the 15-year average. Therefore, this is potentially a time for investing selectively in well managed funds in a staggered manner. The China Plus One strategy, the benefits of PLI, and even a weaker Rupee, to some extent, would help the domestic manufacturing sector to thrive compared to any other sectors. Given these factors, and as the Rupee seems to have stabilized after a bout of weakness, we could expect overseas flows to pick up once there is more clarity in the direction of Fed policy.

While it is in the nature of markets to correct after a significant uptick, it is imperative that fresh investments or additional investments may be planned in a phased manner. Themes like BFSI, manufacturing, and strategies which focus on sectoral rotation may be preferred at this juncture.

Leave a Reply