The article’s author is Pawan Parakh, Portfolio Manager of Renaissance Smart Tech, offering WealthBaskets on our platform. Check out their portfolios here.
Alpha Portfolios are WealthBaskets curated by Renaissance Smart Tech, which follows the strategy of investing in good quality businesses that can deliver sustainable growth over the medium to long term.
Fed Rate Hike: Time to Panic or Party?
We are at the brink of another US Fed meeting and given its cruciality for equity markets, none of my monthly notes have missed mentioning about global inflation in the last 6 months.
This month should be no different. While a 75 bps increase in interest rates is almost a certainty, the more important thing to watch out for would be the commentary of the fed chair. Equity markets have rallied over the last month in the expectation that the size of the rate hikes is likely to reduce from Dec-22 onwards. Post this FOMC meeting, calendar year 2022 would stand as the year of the fastest rate hike cycle in the US over multiple decades.
Despite such severe rate hikes, there are hardly any economic indicators which signal a slowdown in the US economy. This makes a very difficult case for the fed chairman and hence his speech would be closely analyzed by economists.
India’s Unshakeable Economic Resilience
Meanwhile, Indian economy continues to tread gradually in the right direction. We are in the midst of Q2FY23 earnings season. Consumption demand in India is a tale of two stories. While urban demand continues to be very robust, rural demand is a bit subdued.
This seems to be a secular trend across multiple sectors
like
consumer staples,
organized retail,
building material
and
auto amongst others. Our channel check suggests that the
real problem with rural demand is
inflation and not really income decline.
For instance,
the price of an entry level
motorcycle
has increased from ~Rs 40,000 to ~Rs 60,000 in last 2
years. This implies a serious increase of ~50% in just 2
years. During the same period, income levels have grown
but certainly not to the extent of cost increases.
Consequently, it would take some time for rural consumer
to adjust to the new reality.
Fortunately, the reservoir levels post the monsoon season, paint a promising outlook for the Rabi season. We expect rural demand to recover gradually over the next 1 year.
Our views on recovery in the capex cycle have been further bolstered in the current earnings season. Most corporates have been busy deleveraging over the 2012-2020 period. Now the theme has shifted to capacity creation, while maintaining balance sheet discipline. This is secular trend across multiple sectors like Metals, Auto, Chemicals, Renewables, Data centres and several others. While part of robust tax collections is diverted towards funding the fertilizer/ food subsidies in the short term, the long-term outlook for infrastructure spends in the country remains promising.
Indian Stock Markets: The Future is Bright!
This would give further strength to the investment climate in the country. Despite the volatile global economic and geopolitical environment, the fundamentals of the Indian economy remain strong.
India cannot remain completely immune to global macros, but we believe the Indian economy would escape the global turmoil with a few minor bruises. Apart from improving fundamentals, domestic retail liquidity has come as a major support for equity markets.
Over the next 1 year, as the global volatility mellows down, FII flows would chase growth assets. India being the fastest growing economy, would stand to benefit from global flows as well.
Notwithstanding short-term volatility, we remain sanguine on the economic outlook for India. Our portfolios have performed exceptionally well over the last 1-2 years. Our portfolio comprises of companies with high quality businesses/ managements and moderate to low debt, which makes us confident on the portfolio performance going ahead as well. Happy investing!
