By Manish Jain
Almost 2 months of the current year are over, stunning how time flies by. Difficult to imagine that almost 1/6th of the year is already over. Markets are down 4% so far this calendar year, a very different scenario as compared to the narrative set towards the end of last year. So many domestic and international issues that are cropping up are likely to continue to weigh the markets down.
One issue that’s pulling the markets down globally is inflation. US policy rates continue to hover around the 0.25% mark while inflation has topped the 7% mark. The stickiness of the inflation is more worrisome than the trajectory itself. This essentially means that Fed action is going to be sooner than expected and the rate hikes are more likely to be front-loaded than earlier expected. Inflation is an issue in India as well with CPI now topping the 6% mark, you should expect the interest rates to have bottomed out here. Rates, albeit measured and controlled, are
likely in 2022 in India.
So, the key question is what should an average investor be doing in this scenario?
Here are key things to watch out for:
a) Watch out for the macro trends: 2022 is likely to be very different as compared to what 2021 looked like. The key theme this year is likely to be a strong revival in the private sector capex. Strong demand, formalization and rising capacity utilization have ensured that we are at the cusp of the revival in private sector capex. This essentially means that the banking sector, which has underperformed for the last couple of years, is most likely to show strong performance this year. So, as an investor, it is essential and imperative that we understand the economy and the broader trends to be able to take correct sector exposure.
b) Earnings sensitivity: As bull runs typically continue, valuations tend to become expensive. In such scenarios, the reaction to earnings missing the expectations, even slightly, is fairly strong. A case in point is the IT sector in 2022 in the last couple of months. So, in markets like these beware of the potential sectors/stocks which may miss earnings expectations.
c) Risk-reward: In a rising interest rate scenario stocks that tend to correct the most are the ones where risk-reward is most unbalanced. Typically sectors like IT, real estate and media, in the current context, where multiples are way above the long term average are the ones that are likely to correct the most while sectors like banks and Auto are likely to outperform.
Finally, in the end, hold on to your conviction and in the short term, invest more and hold tight. Do not succumb to pressure and fear. Quality always pays in the medium to long term. So, buy quality, even if it comes at a price. Remember, a wise man once said, spend more time in the markets and don’t try to time them.
(Manish Jain, Fund Manager, Ambit Asset Management. Views expressed are the author’s own.)
