Market Turbulence: Way forward

Excerpt of the note sent out to our PMS investors

How is the world looking like right now?

As you are all probably aware, the last one and a half years have been fairly turbulent. Covid had seen a very large demand destruction especially in the lower income families in India. Add to it the challenges of a war in Ukraine which has severely disrupted the commodity and energy markets. This has resulted in a fairly challenging global economic situation. 

Across the world, the central banks are tightening interest rates to contain inflation, which was a problem that was created by the central banks in the first place by huge liquidity pumping. There is a possibility that inflation will persist on the higher side for the rest of the year. This means we are unlikely to see any reversal of interest rates in the immediate future.

Two other important fallouts of the Ukraine-Russia war:

• a realization a country needs to have a secure supply chain for its most critical consumption items

• ability to defend your territorial integrity either by yourself or through politico-military alliances.

These will in turn lead to more “friendshoring” and building of slack in the overall supply chain. 

Defence will remain a key focus area.

Fig: US-China relations getting poorer with a sharp increase of exports from India to the US

Countries like Japan and Germany, who have till now refrained from spending much on defence since WW2, have started doing so once more. Alliances like NATO, QUAD etc will remain at the forefront of political alliances between like-minded countries. The net outcome of this is a major China+1 push by western countries for their businesses.

Some updates on the Indian economy

As per the latest government release, the household outlook on income has been improving in the past few months and is at its highest in over three years. Consumer outlook on non-essential spending has turned positive for the first time since the pandemic indicating an improved willingness to spend. Govt finances look promising. Tax revenues continue to see robust growth. Govt is on track to deliver higher capex growth, as Apr-Jan has seen strong growth of 29%.

India is undergoing a K-shaped recovery. High income households are spending well which is evident from an uptick in sectors related to hotels, airlines, high value items like luxury watches, scotch whiskey consumption etc. India, incidentally, has become the largest consumer of scotch whiskey by volumes in the world, overtaking the French. Lower income households are slowly making a comeback but two-wheeler sales or sales of low-priced discretionary expenses like chappals and underwear have been seriously impacted.

In manufacturing, we are seeing a very strong migration of global businesses away from China. India is one of the potential beneficiaries and it is a decadal theme. China’s manufacturing dominance took over two decades and the next decade is likely to belong to non-Chinese emerging markets.

I believe India is on the verge of a big capex cycle recovery which will play out in the coming two to three years. PLI schemes, govt focus on railways, highways, airports, water distribution, green energy and other infra projects are also seeing a large bump up in the central budget.

Fig: India has taken up a large mindshare in the global business world.

Src: Bloom

With the turbulence in the markets, it is possible that some of your individual portfolios are temporarily in the red. Markets are currently in the stage where it is digesting the huge gains in the Covid years. This is not unusual. Equities are a non-linear asset class and short-term drawdowns are a part and parcel of the overall scheme of things.

For investors with a long-term view, times such as now is a great opportunity to keep adding capital to their portfolio. I am firmly of the belief that once Indian markets pick up, it will provide disproportionate returns.

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