Global
The bond markets have been indicating for some time now that there is a likely slowdown coming not just in the US but globally. With the US 2 year and 10-year bond yields now inverted the likelihood of a recession over the next 12 months is high. Although the Federal Reserve (FED) is likely to raise interest rates at the next monetary policy meeting by 50bps and announce reducing its bloated balance sheet, markets are still hopeful for a soft landing. We believe the FED will be tightening into an economy that was already showing signs of weakening and hence higher risk of hard landing. Expect downgrades to global growth over the next 6 months and in turn corporate earnings where margins are facing huge headwinds from the Ukraine conflict and extended supply side shortages.
Short-term the above may lead to equities being the asset of choice over bonds (given rising bond yields) but this will reverse once the market starts facing the reality of stagflation/ recession. Thereafter we do expect a huge capex cycle to begin with governments and companies looking to fill the supply security risks which have become so apparent from the Pandemic and ongoing Ukraine conflict. So, whilst we retain a cautious stance in the near term as volatility may remain elevated, we feel this will throw up excellent buying opportunities.
India
India market held up really well despite geopolitical tensions, spike in commodity/crude prices and resurfacing of supply chain issues and expensive valuations. This is remarkable, which we can attribute to financialization of domestic savings.
Till recently we were positive on India's external strength on back of healthy forex reserves. Now at margin, externals are weakening this could weigh on INR and yields going forward. We expect RBI to acknowledge inflation and change its stance from accommodative to hawkish in coming monetary policy.
On a positive note, India handled geopolitical situation well by keeping neutral stance on war. Noteworthily signing of FTA with Australia signals, India looking to increase export avenues and this is structurally postive. Opening up of economy is also supporting growth momentum mainly in services segment.
We are entering earning season with cut in estimates for discretionary and durables as market started pricing in higher input cost. In past we mentioned that we are at peak of earning cycle and now with current geopolitical set up, we see rising probability of downward earning cycle. We are not too concerned on weakening earning cycle, given healthy corporate and banking balance sheet along with reasonable demand. We are closely monitoring inflation and its impact on demand which will weigh on corporate India earning and sentiment.
Fund positioning
In the backdrop of elevated geopolitical risk and domestic sector opening up, we stay selective on our exposure levels. Within sector we are selective on corporates with quality management and with better pricing power.