In the wake of India’s high inflation and slow growth, analysts say the country is witnessing classic signs of stagflation, which is not only destroying the current growth but corroding the future growth as well.
In the wake of India’s high inflation and slow growth, analysts say the country is witnessing classic signs of stagflation, which is not only destroying the current growth but corroding the Future growth as well, Indian stock market news today.
Currently, inflation is driven through cost-push and supply limitations. High inflation reflecting higher interest rates has further slowed down the economic activity. Stock selection in such a scenario has become complex on account of elevated inflation and sluggishness in growth. In such a situation, experts balance sectoral mix with stocks having least sensitivity to inflation (such as export oriented sectors) and which offer limited downside in case of higher inflation trajectory (quality cyclicals).
Analysts believe using only monetary tools currently is not likely to ease down the inflation, but is only likely to be detrimental to the growth. In the current scenario, even though the core inflation remains at the lower ebb, demand conditions are weak due to destruction in savings and disposable income. Elevated interest rates are adversely Impacting manufacturing activity.
Inflation needs to be tackled addressing the supply restraints; even if they are implemented now their impact will be with a considerable lag. There is an urgent requirement for non-monetary measures such as greater regulation in commodity trading, increasing the investment in warehousing and reducing the intermediaries etc. to control inflation.
Analysts expect slow pick up in earnings growth, largely driven by outperformance in export driven sectors (currency benefit and global recovery). Late cycle domestic earnings recovery is largely contingent on strong political mandate post elections. Though the US is witnessing strong economic recovery and showing resilience, QE tapering and subsequent Emerging markets flows reversals remain key overhang. Sensex now trades 7.6% higher than the lower end of the range and 7% lower than the higher end, offering 7.5% upside over the 1-yr period.
The top picks comprise of a mix of low inflation sensitivity and limited downside risks. Whilst Indian markets continue to witness high inflationary volatility, likely revival on policy front, pickup in investment post elections and bottoming out of industrial growth may not provide sufficient tailwind for sharp recovery.
Market experts expect inflation to persist (until supply side get addressed) and hence believe that India would continue to be a more bottoms up stock picker’s market. Their top picks are a mix of export oriented stocks with low sensitivity to domestic inflation and quality cyclical with strong pricing power and operating in a high demand pull segment.
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