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Avoid Noise, Focus on India Story

27 Jan 2022 , 03:56 PM

As we know the Indian investor is currently worried about inflation, US Federal Reserve rate hike, UP elections, Budget and policies and lastly Covid-19 pandemic. Below are the key pointers that investors need to focus on:

Inflation:

As we know there are two types of inflation, one is chronic and the other is transitory. Currently, inflation looks high especially in the global arena but a lot of that is because of the transitory nature of this inflation.

By transitory in inflation means that it is happening because of certain conditions which will eventually ease out and that inflation will not be there. Instead, chronic inflation is more demand-driven and that is something that needs to be curtailed.

With these Transitory inflation has four avenues:

1. Supply chain disruptions: Covid-19 has impacted the supply chain globally. However, business activities are easing out a bit since the pandemic made headlines in 2020 and led to global lockdown and restrictions. That said, this supply chain disruption for the next 6 to 12 months is expected to further ease out which will have a bearing on inflation itself.

2. Labor Shortage: The shortage of labors is due to transportation. Due to people migrating to their native places, labor shortages have become very evident in India. In countries like the UK, where inflation is high, labor shortages occurred as EU citizens post-Brexit have transited to their native place and have not returned to the UK and this has hampered the supply chain - further taken a toll on inflation in the country.

3. Green Energy: EU nations are chucking out their coal plants. Now renewables have their issue and they cannot be a dominant source as yet for energy. Now when the demand is so high, the EU zone is facing power shortages which have increased costs and thus the inflation has risen.  Energy prices are increasing globally.

4. Oil: OPEC and allies are not increasing their output and this can also be the cause of inflationary pressure.

Hence, these issues are not really chronic and solutions can be expected in the next 6 to 12 months and the inflation will ease out.

Key things to watch would be central governments globally and the Fed probably will be very aggressive in price hikes.

US Federal Reserve rate hike: The history provides inconclusive insights as it is expected that inflation will eventually have led to Fed rate hikes and its impact on markets ahead would be keenly observed.

As per historical data, it can be said that there isn’t any conclusive evidence that the US Fed rate hike will lead to a drop in markets. From 2004 to 2006, where Fed rate hikes were in the range of 1% to a maximum of 2%, the markets did increasingly well on both domestic and overseas front. Hence, there is clear evidence that a Fed rate hike alone cannot lead to severe corrections in the market. In case, there are other incredulous events that are coinciding with the Fed rate hike, then there can be a bearing on the markets. That said, we do not need to be extremely worried about rate hikes. Also, it needs to be noted, easing in inflation can be a reality in the second half of this financial year. With easing in the inflation, whether Fed’s stance becomes dovish will be monitored. However, if the Fed chooses to hike rates yet history suggests that we are not in very difficult times related to markets.

UP Elections: A lot is at stake for the BJP government as they approach the UP election in 2 years. In India, the UP election is the mother of all state elections as it has a huge bearing in terms of seats in both Parliament houses.

Budget and Policies: This also points out that possibly this Union Budget 2022-23 will be pro-farmers driven and less policy-driven. No big bang policy announcements can be expected in the next three to four months until this election passes out. The country will also not see many fuel rate hikes ahead. Even currently, when Brent Crude is at a multi-year high, fuel prices hike has been curtailed. Hence, all focus will be on this election and the majority of policies would tend to favour farmers.

Covid-19: The current situation of Covid-19 is that a new variant has rapidly spread globally leading to lockdown restrictions. However, the Omicron virus variant is a blessing in disguise as it has low mortality in comparison to the Delta variant which was a result of the second wave in early 2021.

If the Covid virus does not mutate any further ahead, then in such a scenario the world will have to learn to live with the virus similar to how it started living with the influenza virus (flu) which had taken the lives of million people in mid-1930’s.

The robust vaccination drive in India gives the country a premium outlook in comparison to other emerging markets. India has crossed 150cr doses resulting in an undisputable edge over its emerging markets peers such as Russia, Brazil, Philippines, Indonesia, South Africa, etc.

Outlook

The whole idea is that we remain buoyant on the India story in the medium term. Our belief is to focus on India growth story. We know there are headwinds ahead. We know this year is not going to be the same as last year. But if we avoid these short term hiccups that this market might have to endure in the near term, the long term outlook on India remains unperturbed.

Omicron virus variant might have slowed down the economy for a quarter or so, but surely India is set to bounce back to some very good numbers going forward which should support our markets at every juncture and give us chance to grow ahead.

Strategy 2022

As an investor be nimble-footed, be selective and have tapered expectations. Unlike 2021, where the markets witnessed a broad-based rally, the year 2022, is going to be a stock pickers year. There are already signs of stocks being thrown away due to bad results. Profit booking has been very sharp in the range of 20-30% in midcap and small-cap stocks.

Moreover, the economy faces more headwinds than tailwinds this year and thus being selective while picking stocks will be pivotal for return generation this 2022. Investors should be moderate expectations and be realistic which will augur well in decision making while selecting their investments.

Noteworthy, corrections are healthy for the market as they weed out excesses. Moreover, it also gives an opportunity to correct past mistakes, make an entry into new high conviction stocks and restructure portfolios.

Portfolio Strategy:

In terms of dynamic funds, the idea is to keep the focus on alpha generations. We were very cautious three months back and thus approximately 80-90% of our portfolio was skewed in favor of large caps.

Amidst markets correction, we strategically started investing in high-quality mid-cap stocks which became value picks post-correction. Our alpha generation ideas have increased to approximately 17% as of December 31, 2021, as compared to 10% in October 2021-end. The ideas continue to increase even in this month as well. Our alpha generating ideas have given double-digit growth and we are scouting for more such ideas.

That said, we intend to further consolidate our position in existing alpha generating ideas as well as enter newer midcap stocks if markets correct any further. Our focus is and will continue to generate risk-adjusted superior returns for our investors.

The author of this article is Mr. Ujwal Shah, Fund Manager, IIFL Securities

Related Tags

  • Budget
  • covid-19
  • inflation
  • UP elections
  • US Federal Reserve rate hike
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