Global – Emerging Risks
Global markets finally fell near to 5% in September and for the quarter the US eked out a small 0.2% gain, one of the smallest since the onset of pandemic. Perhaps, the realization that the inflation will persist well into 2022, coupled with slow economic growth and higher oil prices, led to a long-awaited turbulence in markets. In fact, the narrative is quickly changing to a possible risk of “stagflation”, particularly in Europe and the UK where energy costs are significantly higher.
We believe that the earnings season and the commentary on how margins, supply disruptions and slower consumer spending is having an overall impact on profits, will be a crucial event for markets. The one area which is yet to be impacted by all the problems has been analysts forecasts, and we believe the risk is clearly to the downside.
All in all, though investors continue to largely ignore all the challenges that are being faced by the global economy. For example, the problems in China are now being outweighed by the positive expectation of liquidity being induced into the system. That said, a rapidly slowing Chinese economy will impact the global growth. At present, liquidity remains abundant and "buy the dips" is keeping the markets hover around record levels. Time for caution on the markets.
India – Waning risks
Stable GST collections, PMI above 50, decreasing Covid risk, strong monsoon spell and improving management commentary on demand were key positives in the last month. However, India is still recovering, and the current global supply disruptions and rising energy prices has the potential to convert this transitory inflation into structural. This could have monetary policy implications and could potentially impact demand over medium term.
India reopening has picked up pace now, most states have allowed schools, theatres, and malls to re-open. This is encouraging for consumption and services demand recovery. Significant employee churn in IT and BFSI sectors is also positive for consumption. India’s growth has more upside risk in the near term.
With the earnings season approaching, we do not expect any major positive or negative surprise though the management commentary on demand may stay positive. Few sectors where input/final product is import/export dependent could have concerns due to logistic issues.
Currently, spot rate on shipping has gone through the roof but contracted rates are relatively stable (source: World Shipping Council). We expect that the renewal of contracted shipping rates may get negotiated at higher levels, and this could potentially impact margins for the listed players over medium term. For the next few quarters, listed players will continue to benefit from pricing power at expense of MSMEs
We expect that the rising inflation could spoil demand recovery, but in medium term.
Portfolio Stance – Neutral
After a strong rally in the recent past, we are seeing a few orange flags (potential red flags) on global growth (led by China), high inflation (globally), supply issues and waning fiscal measures. High global risk but declining domestic risk, and India’s relative outperformance, calls for a neutral portfolio stance from near term perspective. We expect services sector (domestic oriented) to outperform while globally linked sectors may notice a risk-off market.