The biggest concerns for the investors from the global front are rate hikes and balance sheet reduction by the US Fed, elevated inflation worldwide, the Ukraine-Russia war and the war of words between the US and China on Taiwanese unification/independence.
On the domestic front, apart from high inflation, soaring trade deficits, rupee depreciation and falling forex reserves remain the major macro factors, which give worries to investors.
However, investors need to worry most only about the US Fed balance sheet reduction plan and possible conflict between the US and China on the Taiwan issue.
Peak inflation is, perhaps, behind us. The high base effect and recent fall of over 22% in crude oil prices and over 30% fall in metal prices along with a significant fall in edible oil prices would bring down the inflation rate going forward.
In addition, a successful monsoon in India would also help in mitigating the risk of inflation in a significant way.
Rate high by the US Fed is not a major concern – with the latest hike, the current benchmark interest rate in the US has actually crossed the mid-point of the ultimate targeted interest rate of around 3.50%.
Global equity markets would soon start discounting fully further any possible rate hikes. On the Ukraine war front as well, there is no need to worry much – Russia has opted for the incremental war in Ukraine and the same may go on for another one or even two years. Global equities would soon learn to live with this event for a much longer period.
Thus, on the global front, investors need to worry only about two major factors – the US Fed’s balance sheet reduction plan and the war of words between the US and China and then whether the same would lead to any possible serious conflict.
The US Fed has proposed to reduce its balance sheet by $2.5 to $3 trillion and now every month $47.50 billion of assets is reduced and correspondingly dollars circulating in the open system are sterilized. It intends to hike it to $95 billion per month from September 2022.
This would obviously strengthen the dollar once again against a majority of the currencies in the world. Any possible aggressive plan to hike this limit again much beyond $95 billion per month after September 2022 would be a major risk factor for the emerging markets including Indian markets. Further strengthening or weakening of the dollar (rupee) would lead to once again a significant outflow from the FIIs from the Indian markets.
Any possible full-fledged war in Taiwan would once again inflate oil prices substantially and also erode sentiments in the global equities and the world over, the equity markets could correct at least 10%, if not more.
Considering the complexities of global politics and geographies, if war starts in Taiwan, it is not likely to be an incremental war lasting for a longer period like in Ukraine. This time damages to the economies and markets world over would be sudden and swift.
As far as the concerns for the domestic markets (high oil prices and growing trade deficit, FIIs outflow, falling rupee and depleting forex reserves) would again depend on these two key global risk factors – any possible war in Taiwan and further shrinking of the US Fed balance sheet.
This may not be the right time for China to get engaged in any major war; problems with real estate and therefore, its banks, slowing GDP growth and growing public debt do not augur well for commencing a major war at this juncture.
Postponing the war and maintaining the status quo would be the best option at this juncture, in fact, for all concerned players.
The US Fed might not opt for too aggressive hikes in the asset reduction plan beyond $95 billion per month after September - already there are reports of US corporations operating outside the US losing their profits due to dollar appreciation.
Any further steep appreciation of the dollar would dent exports of goods and services of the US as well. Therefore, we hope that the risk from these two global factors starts fading soon. In contrast, if these two risk factors materialize, then the consequences would be quite serious for the equity markets.
Hence, domestic investors should follow a cautious approach for the next two months. The best equity research strategy could be generating 5% to 10% cash in the equity asset class, having a tilt towards large caps and FMCG stocks and having around 5% exposure to gold as an asset class.
Remain alert for the next two months, and if fear of war in Taiwan increases or the US Fed announces further steep hikes in the monthly quantum of balance sheet reduction beyond September 2022, then the domestic investors should opt for hiking cash calls aggressively and substantially.
If Indian markets overcome these two possible risk factors successfully, then the domestic markets would set in for a major rally as India is likely to post the fastest GDP growth among major economies over the next one to three years.
Till these fears subside, it is better to be alert and extremely cautious about equity as an asset class in the short term.
(The author is the Founder & Head of Research of Equinomics Research & Advisory Pvt. Ltd)
Disclaimer: The views and recommendations made above are those of the author and not of MintGenie.