Inflation is at an all-time high with even the prices of essential commodities now touching sky high. Inflation-driven interest rates translate to either more debt or a slower demand. This is bad news for companies with high debt levels. That is why investors must now park their money with companies that have strong fundamentals, a visible moat and long-term growth opportunities. Prathiba Girish, Founder, Finwise Personal Finance Solutions in an interview with Abeer Ray of MintGenie explains how the inclusion of high-quality stocks and equity mutual funds is a must for anyone looking forward to creating a sizeable corpus in the future.
Q. Companies with high leverage will see their interest payments balloon. With constricting margins and higher interest payments, where do you see corporate earnings going in the next quarter?
Corporate earnings are impacted by both demand growth as well as inflation driven interest rate increases. At this point, corporate India is recovering from a bottom as far as earnings/GDP is concerned. Demand recovery at an overall level bodes well in this regard. That said, out of control inflation in the short term can put a spanner in the works to this nascent economic recovery. Hence, in the short-term, adverse impact on earnings for high-leverage companies cannot be ruled out.
That said, high leverage is never a good thing - whether for a corporate or an individual. We would always advise investors to select companies with strong balance sheets and good long-term growth outlooks for their long-term portfolios.
Q. What impact do you see on retail savings with FD rates rising but the stock market and mutual fund returns at a year's low?
It is good news that retail investors can get better returns from FDs after a prolonged period of subdued returns. FDs somehow spell comfort fora lot of retail investors since guaranteed returns, periodic pay-outs if needed and no volatility is a great combination. This combined with lower returns in stock markets in the past few months may tempt people to turn back to FDs. However, one must bear in mind, that despite the increased returns, given the increasing inflation, FDs continue to generate negative real returns and remain tax unfriendly. It can at best preserve wealth and anyone looking at building wealth should look at growth assets such as high-quality stocks and equity mutual funds in adequate proportion for their long-term goals.
Q. Inflation is also eating into the savings of people and this cannot be a good sign for the economy as a whole. What do you think about it?
Yes, increasing inflation is worrisome, especially at this point in time when we are just coming out of the problems caused by the pandemic. The hope is that these increased levels are transient. Otherwise, it is likely to have an adverse effect on people's wallets due to the reduced quantum of money available for expenditure and savings due to an increase in expenses, which will lead to reduced demand at an overall level, which will in turn impact growth and corporate profitability adversely.