Inflation and a change in narratives - Equities

India’s benchmarks for equities, the Nifty 50 and Sensex, were down about 4-5% at one point in June 2022*.

Fears of a likely recession in the US and a steep hike in interest rates led to volatility in US equities, impacting global markets, with India feeling the heat, too.

The US Federal Reserve, the central banking authority in the US, hiked interest rates by 75 basis points in June, its sharpest rate hike since 1992^ as it looked to tame inflation.

Inflation, of course, has been the talk of financial markets globally.

The rise in prices is at multi-year highs, and in some instances, at multi-decade highs across the world, and has seen interest rates being hiked over the past few months.

The Reserve Bank of India, too, hiked interest rates in May, and then again in June.

But the current conversations around inflation and elevated commodity prices could change soon.

“…around Oct-November there is a high probability of narrative being shifted from inflation to growth,” said Pankaj Tibrewal, fund manager for equities at Kotak Mahindra Mutual Fund, while discussing the outlook for July.

Crude oil prices, which are one of the major contributors to inflation in India, are stabilizing around $100-$115 per barrel, which is about 10-15% lower from its recent peak.

India is heavily dependent on imports for crude oil, and the recent stability and the government’s efforts to procure crude oil at lower prices could help in containing this runaway inflation, Tibrewal said.

Even though elevated commodity costs are likely to impact corporate earnings over the June and September quarters, these seem to be near-term headwinds, and should not deter investors.

“…rather than obsessing over the fear of fall, we would encourage investors to use such opportunities to increase allocation to equities, especially if one is underweight in this asset class, as is case for majority of Indians,” Tibrewal said.

It is imperative that investors should continue to follow a disciplined asset allocation strategy with a long-term horizon.

 

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*Source: NSE India

^Source: www.cnbc.com. Data as of 16th June 2022

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