It is no doubt now that we are currently traveling through a transition period of a slowly shifting macro environment both globally as well as domestically particularly when we have witnessed the kick start of interest rate cycle recently. The macro environment is usually slow moving parts of the economy and has a long cycle period. It includes trends in the domestic product (GDP), inflation, employment, spending, and monetary and fiscal policy and is closely linked to the general business cycle as opposed to an individual business sector. Also, it’s not necessary that all the factors of the environment change simultaneously or to a similar degree in each cycle. The rate of change is different and some factors may remain more prominent than others.
The amount of the macro environment’s influence depends on how dependent a business is in the overall economy. Cyclical industries, industries that are highly dependent on credit, consumers as it directly affects its ability and willingness to spend, discretionary are examples of highly dependent industries while basic staples and defensives are less dependent.
As far as the current environment is concerned, we are transitioning through a policy rate hike cycle led by higher inflationary pressures which is expected to have an influence in investing behavior as well due to their impact on various businesses in their own way.
To elaborate, there are basically two main factors which almost all the central banks barring a few targets and these are growth and inflation. The behavior of the central bank from a policy perspective is different in both these scenarios and it tries to create a healthy balance of both.
In an environment where central banks’ focus is on the growth, rather than the investing thesis, they should be more oriented towards factors which could be adding to the same and accordingly have positions in businesses which could grow at relatively larger pace and any disinflationary factors are not supported. However when the regime changes and central banks focus shifts to inflation then any sub-factors which could led any inflationary pressure are viewed contrarily. Hence, one should follow this basic principle while investing in these two regimes and allocate accordingly businesses to their portfolio.
Coming to the investment strategy, Indian market in near term could be more driven by global macro including forthcoming US Fed policy moves and inflation outlook. For longer term market Indian markets are best poised to grow relatively better than large global peers. Investors should have a balance in their portfolio with investments in cyclical and non-cyclical stocks. In terms of deployment, investors should not hurry and invest all at one go and instead should approach in a scattered manner to balance risks.
On sector specific, industrials & manufacturing, chemicals and specialty chemicals should continue to remain in favor while IT, Tech & Services which has seen some corrections recently has become attractive for mid to long term. Currently consumer and discretionary space is looking vulnerable due to low volume growth and muted consumption across rural and urban markets in near term.