History suggests inflation and interest rates have had little impact on market returns in the long term

NEW DELHI: The stock market has seen a lot of volatility due to rising inflation and consequential interest rate hikes. But data suggest that in the mid to long term, they have not been much of a hurdle for the market.

Historical evidence suggests that equities have done well after the initial phase of volatility recedes in a rising interest rates environment. In fact, equities delivered one of the best returns during the 2004 to 2008 period when interest rates and inflation kept rising, data collated by Edelweiss MF shows.

The fund house, though, said the conundrum of rising commodity prices, rising inflation and thereby tight monetary policy might keep volatility intact in equities for some time.

Inflation in recent months is primarily the result of an easy liquidity scenario maintained by central banks across the world ever since the 2008 financial crisis. Moreover, Covid 19 and the Russia-Ukraine war further exacerbated and elongated global supply chain disruptions, which spooked inflation levels globally.

It is common knowledge that higher inflation brings rising interest rates, which impacts multiple sectors and their growth prospect. With higher commodity prices, businesses grapple with high input costs, resulting in passing on higher prices to consumers. Higher prices, in turn, impact demand.


However, data shows that the market remains mostly insulated from it, barring the initial volatility. The market has grown in every rate hike cycle since 2004, as well as the rate cut cycle. The only exception is the ongoing cycle which is yet to be complete.

But it is not as if the conundrum of high inflation and rising interest rates have no impact on the finances of Indian Inc and its stocks. MF says it may impact the earnings of businesses in each sector differently.

“Auto, Pharma and Banks have performed well during high inflation regimes while businesses that have their demand and input costs sensitive to inflation and rising rates have done poorly,” it said.
During such periods, sectoral winners change dramatically, and it is important to keep portfolios well aligned to reality, said the money manager. Hence, it is crucial to position sectoral and stock allocation well during such periods, when market returns may not come from a broader group but select businesses and sectors, it added.

Similar advice also flows in from other analysts.

“Markets have corrected over the last six months and participants are now quickly discounting the impact of high inflation and the rising interest rate scenario, '' said Anupama Sharma, Executive Director, IIFL Wealth.

“We believe that markets are likely to continue witnessing volatility. In the backdrop of such a landscape, investors should maintain asset allocation disciplines and take advantage of the volatility by building equity positions at compelling valuations.”

Edelweiss MF said it is currently overweight on , Crompton Greaves Consumer Electrical, , , , , & Finance, , , The and .


(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)