By Arun Chulani
Nearly a decade of surprises has taught us one thing; expect the unexpected. We saw several significant events unfold which affected the global economy. From Brexit to Trump to Covid to conflict in Eastern Europe– everything and the kitchen sink has been thrown at the world. Second-guessing what could happen over the next year is nearly impossible. However, as an investor, it’s always prudent to know what are the next big themes so that we can make sound investment decisions over the course of this new year instead of taking reactionary decisions. Some of these themes include:
The conflict in Eastern Europe and the resulting increase in energy prices, have prompted nations to assess their energy strategy. While the transition does not happen immediately, considering it took more than a century for the western world to shift from wood to coal and the same for the world to shift from coal to fossil fuels, but we are hopeful that this time the pace of adaptation will be faster. The energy transition from traditional fuels to an increased mix of clean energy is now high on the agenda of countries all over the world in order to achieve energy security.
The second goal of energy transition is the climate goal of both developing along with developed countries to achieve carbon neutrality which has increased global interest in the sector. Back home, India, too, is leaning heavily on green transition and the government has launched a slew of measures related to renewable energy. In the Union Budget 2023, the government announced a capital investment of Rs 35,000 crore towards green energy alongside a 19,000 crore outlay in the form of Green Hydrogen Mission. This, coupled with robust domestic demand for power has led to an increasing momentum in the energy transition of India.
Inflation and Interest Rate cycle
Post the Global Financial Crisis of 2007-2008, also saw the rise of Quantitative Easing, yet the inflationary pressures were not as great then. What is different this time? One of the major reasons is that, yes, we have seen a massive influx of dollars pumped into the system thanks to Uncle Sam and friends. However, this was combined with the execution of sizable fiscal programs across the world, including India’s Gati Shakti and National Infrastructure schemes which are together budgeted to be in excess of USD 2.5 billion.
Now that China is opening up, it’s likely that they, too, will kickstart the economy through infrastructure programs. And thus, while it may seem that we are closer to the end of the rate hike cycle, this giant may say otherwise. Certain parts of inflation, though, will never come down. As a result of the China + 1 impact on supply chains, production may end up in countries with higher cost structures for the sake of diversification.
The rise of emerging markets and value investing
Years of free money resulted in an influx of investments into areas such as the FAANGS. The tightening, on the flip side, is likely to lead to a reversal of that and a re-rating on the downside. Due to recency bias, some investors may continue to buy into these stories, but it is still quite possible that their day in the sun as investment leaders has set. Being in stocks with reasonable valuations that aren’t heavily inflated is one way to weather any storm that comes our way. If they didn’t rise dramatically, there’s reason to believe they won’t fall dramatically.
Today, emerging markets are in better shape. Some like India have a majority-led government that can push things through along with pro-business policies. Many are benefiting from the China+1 tailwind, especially in the manufacturing sector. Additionally, many countries now possess an increased productivity due to digitisation. Governments and companies have weathered bigger storms before. We have observed that disciplined governments didn’t go wild with their monetary policy during the Covid days. Businesses in Emerging Markets are also used to dealing with inflation.
Even as countries around the world may tighten their belt fearing a downturn in global markets, India looks to be in better shape. Sure, the waters might turn choppy for a bit and we might witness a slowdown and sometimes the headlines and the “experts” can create doubt. But it might be helpful to focus on the big themes as well as keeping a sense of optimism. The world has been through a lot over the last years, yet, we are still standing and hopefully whatever is thrown our way, we should continue to do so.
(Arun Chulani is Co-Founder, First Water Capital Fund. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)