Over the years, there were two main reasons for the Indian stock markets to gain, low crude oil prices and plenty of liquidity in global markets thanks to soft money policies of major central banks.
While low crude prices turned the Indian economy from wealth destroyer to wealth creator in terms of better fiscal positioning, accumulation of forex reserves and higher corporate profitability, the other factor resulted in risk reversion i.e. higher appetite for equities and the resultant rise in valuation of asset classes.
Today, both these major factors have turned around i.e. inflationary expectations have been rising in line with the rise in crude oil prices and it is putting pressure on the domestic currency. And global liquidity started tightening as global central banks trimmed bond purchases and some even went ahead with interest rate hikes.
Now the question is, how to position yourself in the changing dynamics of global macros and domestic macros. In my opinion, it is always better for equity investors to be dynamic enough with the changes in the underlying economics.
We had the excesses in some sectors, which are now subsiding with the change in market perception of future growth and, simultaneously, there are a few sectors with a stable set of earnings growth expectations and those continue to be outperformers even in the recent market correction.
While long-term investing that many talk about ‘stands tall’ in the case of our economy, but in my view we have to keep a close vigil in the developing variables, which would decide how the future would look like.
Going contrarian is a strategy that many had adopted in the past and which actually proved fruitful, especially at times of general pessimism in the market. But I think in this pessimism, there are a few sectors or stocks that keep on getting re-rated owing to firmness in earnings expectations.
We all know India would see a series of state elections before the general elections in May next year and there is going to be a tight fiscal balance as there are fair chances that tax collection would be lower (going by the first six months), especially in view of the lower market borrowings by the government in the second half of the financial year, and a tilt in government spending more towards the rural side.
The second big theme would be sectors that are benefitting from the improvement in growth of developed economies supported by the tailwind factor i.e. weakness in local currency. In view of the above scenario, it would be prudent to go overweight on sectors benefitting from government spending on the rural economy like agrochemicals, two-wheelers, FMCG and others like information technology and pharmaceuticals.