We have witnessed swings for the past 6-7 months; index movements of 10-15 per cent successively in both directions, in such a short span of time.
With multiple headwinds such as an uncertain geopolitical scenario in Europe, stubbornly high inflation, reduction in liquidity and rising interest rates (globally and domestically) and the risk of earnings downgrades, the net outcome of these swings has been expectedly downward.
But, we also need to acknowledge that there are some positive developments. Given the significantly high level of vaccination in India and the relatively limited impact from the Omicron variant witnessed as compared to the earlier waves, the concerns on this front have eased. The trend in GST collections has been buoyant.
India is politically and economically stable, and favourably placed as compared to most other large economies in terms of its growth outlook and forex reserves.
Inflation has emerged as the largest concern this year. Within impacted sectors, larger companies are better poised to gain market share from the midsized ones, in terms of their ability to absorb a part of the inflationary impact.
Among others, there could be sectors that could be relatively immune, and therefore which merit attention post the correction in stock prices.
The IT sector, for example, is one that is unlikely to see an impact of inflation on the demand for its services; the demand outlook for IT services is presently strong.
Higher compensation to employees (for curbing attrition) could impact margins to an extent but may be offset by the strengthening of the US dollar.
In the manufacturing space, there could be specific companies that could benefit from the Production-Linked incentives and post strong growth over the next couple of years.
While inflation would impact such companies as well, the incentives could help offset this impact. Some specific sectors could continue to gain from the structural shift from China, as alternative suppliers.
The banking sector is well-poised and is likely to do well in terms of margins in a rising interest rate scenario (as loans are likely to be repriced higher at a faster rate than deposits) and with credit costs under control.
Rural growth has been a concern in the recent past, but with higher agri-prices and the possibility of a good monsoon, we could witness a revival over the next few months, benefiting some specific sectors.
Energy & Metal Stocks:
Given the uncertain geopolitical situation, we could also witness select energy stocks doing well (however cyclical such as energy and metals are sectors that need constant monitoring by investors, and are difficult to forecast).
Another sector where there has been a positive sentiment but where investors need to be cautious would be industrials or domestic capex-oriented companies.
A lower figure for disinvestment/privatisation, a higher interest cost (on an already elevated level of borrowing) and elevated levels of crude oil could make it difficult for the Govt to spend as much on capex as it had intended to in the Budget.
With consistent selling by FIIs over the past few months, the FII ownership level has reduced. With India’s competitive advantages over many other markets, a lower FII ownership could aid incremental inflows in the longer-term after global markets stabilise, even if the outflows persist in the shorter term.
The sustained strength in retail inflows into domestic funds should continue, with equities being one of the very few options for retail savers to earn post-tax returns in excess of inflation over the longer term.
Thus, while investors need to brace themselves for a continuation of volatility in the near term, the recent sharp correction in some of the sectors has resulted in opportunities for long-term equity investors who are willing to look beyond the next couple of years.
(The author is Chief Investment Officer,