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Inflation, crude oil, delayed rural recovery, among key factors that may drag Nifty; check investment strategy

RBI will keep hardening the rates posing a risk to earnings, balance sheet, and capex of the corporate sector.

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The valuations are inexpensive, the market is generally mispricing these stocks and yet the long term continues to remain attractive

By Manish Jain

They say change is the only constant. Nothing can be truer, especially in these current times. The equity market fortunes have changed in the last six months, and how. Towards the end of CY21, we believed that nothing could go wrong as we sat atop a long 15-month bull rally which saw the NSE Nifty 50 index yielding a return of an astonishing ~125%. From there to now, where nothing seems to work for the markets and the index has corrected 13% from the peak.

The key question is – what should an average investor do in these times when the world order is changing as quickly as it is? We will get to that question in just a while, in the meantime, the key question is – what are the risks that still exist for the markets even at these levels? What are the factors that can bring Nifty down a little further? A good risk assessment is key to smart investing!

First and foremost is Inflation – Till about December ’21 we believed that India was largely insulated from the world trend but alas we seem to be now catching up, albeit with a delay. This in my mind is probably one of the biggest risks that stand in front of the equity markets today. We have already seen CPI rise from 6% to ~8% in a short period and 9% now looks just a stone’s throw away. This makes us believe that RBI will keep hardening the rates posing a risk to earnings, balance sheet, and capex of the corporate sector.

The second risk is rising crude prices, Brent is already at US$112, up ~45% YTDCY22 basis. As China opens up and supply continues to lag demand these prices will likely keep hardening. This will mean that commodity prices will keep moving up thus putting further pressure on margins. In such a scenario, Nifty earnings will continue to have downside risk.

A delayed rural recovery – last year unseasonal rainfall had put a sudden brake on rural demand and something of this sort cannot be ruled out again this year. A steady recovery in rural demand is quite critical for a recovery in Nifty earnings growth.

So, now that we are well aware of the three key risks that the equity markets face, we circle back to the question from earlier – What should the investor strategy be?

First things first, the best time to buy quality stocks is the worst time. The valuations are inexpensive, the market is generally mispricing these stocks and yet the long term continues to remain attractive. So, do as we do and invest in the Coffee Can stocks.

Second, we are mindful that you will never catch the absolute bottom so relax if the stock falls 5-10% from your buying price. Stick to the buying discipline. The key is to break the fear of greed.

Third, do your homework quite carefully and invest in Good & Clean companies only. The last thing you want is a corporate governance issue at these times. So, the time to buy is now. Be careful, be brave and create wealth.

(Manish Jain, Fund Manager, Ambit Asset Management. Views expressed are the author’s own.)

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