Through Roop Bhootra
There is no doubt that we are currently traveling through a transition period from a slowly shifting macro environment, both globally and domestically, especially as we have recently witnessed the kick-start of the interest rate cycle. The macro environment is usually slow moving parts of the economy and has a long cycle period. It includes trends in gross domestic product (GDP), inflation, employment, spending, and monetary and fiscal policy and is closely linked to the overall business cycle, as opposed to an individual business sector. It is also not necessary for all factors of the environment to change simultaneously or to a comparable extent in each cycle. The rate of change is different and some factors may remain more prominent than others.
The degree of influence of the macro environment depends on how dependent a company is in the overall economy. Cyclical industries, industries that rely heavily on credit, consumers as it directly affects ability and willingness to spend, discretionary industries are examples of highly dependent industries while commodities and defensive assets are less dependent.
Turning to the current environment, we are moving into a cycle of policy rate hikes led by higher inflationary pressures, which are also expected to affect investment behavior due to their impact on different companies in their own way.
To elaborate, there are basically two main factors that almost all central banks have barring a few goals and these are growth and inflation. The central bank’s behavior from a policy perspective is different in both scenarios and tries to create a healthy balance between the two.
In an environment where the focus of central banks is on growth, rather than on the investment thesis, they should focus more on factors that could contribute to it and accordingly hold positions in companies that can grow relatively faster and any disinflationary factors are not supported. However, when the regime changes and the central banks focus on inflation, all sub-factors that could lead to inflationary pressures are seen as opposite. Hence, one should follow this basic principle when investing in these two regimes and allocate companies to their portfolio accordingly.
In terms of investment strategy, the Indian market could be more driven by the global macro in the near term, including impending US Fed policy changes and inflation outlook. For the longer term market, Indian markets are best positioned to grow relatively better than major global competitors. Investors should have a balance in their portfolio with investments in cyclical and non-cyclical stocks. In terms of stakes, investors should not rush and invest all at once, but instead approach it in a distributed manner to balance risk.
On a sector-by-sector basis, Industrials & Manufacturing, Chemicals and Specialty Chemicals would continue to gain favor, while IT, Tech & Services, which has recently undergone some corrections, has become attractive for the medium to long term. Currently, consumer and discretionary space appears vulnerable due to low volume growth and subdued consumption in rural and urban markets in the near term.
(Roop Bhootra, CEO, Investment Services, Anand Rathi Shares and Stock Brokers. Opinions expressed are those of the author.)