By Roop Bhootra
Before coming to the conclusion in terms of the strategy, I think we should first look at the bigger picture and see what’s happening and how are macros placed currently as markets also are not isolated from slow but changing macro regime either globally or domestically. Having said that, let’s look at a few data points on the same.
Firstly, let’s present facts and data on what’s happening in global markets right now. The US and Europe inflation numbers are coming in higher which were last seen in around 1980s, the U.S. dollar index quoting above 100 mark which has happened just 2 times since 2000s, coming to the fast moving indicators the AAII Sentiment index has dropped to lowest since 1992 and staying below 20% for a second consecutive week.
Now coming to the east, one cursory look at Japanese currency and debt markets tells you that some major shifts have also been happening there. The US Dollar and Japanese Yen pair is currently trading too close to 130 levels seen last in early 2000s. Historically, Japanese Yen has remained the preferred choice for carry trade and weakening of Yen against US$ has consequences on carry. Also, the Japanese central bank has been religiously following a policy of yield curve control (YCC) and with weakening Yen it makes YCC increasingly hard to adhere to and puts itself into a catch 22 situation as it can’t strengthen Yen and follow YCC at same time. Also, any move to defend Yen could also have an impact on US 10 year yield which could rise sharply as Japan historically being the largest buyer of the US treasury have to instead sell.
In terms of performance so far in the current calendar year, on YTD basis right now both equities and bonds have underperformed on global basis both Bloomberg Global aggregate bond Index and MSCI All country index are down by 9.9% and 8.8%, respectively. This is a rare occurrence and has not happened at least in the last 30 years.
So in essence, along with the ongoing geopolitical crisis, we are witnessing a multitude of different scenarios in terms of inflation, supply shocks and related macro risks which are signalled by different markets right now. As far as our understanding goes, we are still in a transition period and markets are still at large have not taken a decisive move on either side as many correlations and relationships are at present signalling diverging views and testing each other out. Hence a broad cautious approach is warranted at macro level.
Now coming to the domestic markets, we have seen sustained improvement in economic data albeit with some moderation likely seen due to global uncertainties and worsening external sector yet India remains the fastest growing major economy in the world with IMF estimating it to be about 8.2% this year. India is also so far less risky on the economic growth front in relation to other major economies as domestic data shows significant improvement in businesses as seen in record high GST collection numbers, higher net payroll numbers, better cargo and railway freight traffic movements data, record manufacturing and services exports and gradual recovery seen in industrial production data. All these data points put India’s domestic economy in a better shape as compared to others. The only red flag is the muted consumer sector which is largely due to short term rise in inflation.
Coming to the investment strategy, investors should have a balance in their portfolio with investments in cyclical and non-cyclical stocks. In terms of deployment, investors should not hurry and invest all at one go and instead should approach in a scattered manner either on a time basis or on some event timeline basis like some part to deploy only after first US Fed rate hike and another after second rate hike etc. to balance risks. On sector specific, cyclicals, manufacturing, chemicals and specialty chemicals should continue to remain in favour while IT & Tech which has seen some corrections recently has become attractive for mid to long term. Currently consumer and discretionary space looks vulnerable due to low volume growth and muted consumption across rural and urban markets in near term.
(Roop Bhootra, CEO, Investment Services, Anand Rathi Shares and Stock Brokers. Views expressed are the author’s own.)