Musings on the market
With state elections out of the way, the stock markets will stay focused on the ongoing Russia-Ukraine conflict and energy prices and its implications for domestic and global growth and inflation (interest rates).
We hope for diplomatic breakthroughs to end the ongoing Russia-Ukraine conflict and no further sanctions on Russia’s oil/natural gas exports. This could limit further damage to global supply chains and prices of materials and foodstuff. The decline in share prices in the last month has made many stocks attractive to long-term investors. We believe that even when diplomatic solutions are found, the world will not go to the situation as it existed before Russia entered Ukraine. Material costs will stay higher for longer, consumption will be reduced and interest rates will move up in 2022. Lockdown in China’s Shenzhen and Jilin province amid a surge in fresh cases may impact industries such as chemicals and automobiles. Issues with respect to the ports causing delays with shipping may hurt the global supply chain.
For the past few months, foreigners have sold Indian stocks in large quantities. Indians have continued to buy but not in equal strength. We believe that Indian indices may not fall sharply in the next few months if global conflict does not worsen. We think investors should now start to invest in a mix of defensive and pro-cyclical sectors now.
| Sector | Business Outlook |
| Pharma | Steady growth in India. International business momentum picking up. Restarting of US FDA inspections may lead to quicker approvals, adding to topline growth. |
| Consumer | Revenue and Margin growth will be challenged for the next few quarters. |
| Software Services | The demand outlook is robust for the next 2-3 years. Winners will be focused on Digital solutions for clients. |
| Insurance | Increasing demand as income levels rise. Increased supply of shares may cap the valuations for the next few months. |
| Defence | The importance of having strong local manufacturing for defence needs is underscored by recent global developments. |
| Financial Services | Increasing demand as COVID fears fades, stronger margins as the size of bad loans fall, sufficient new worth due to recent capital raising. |
| Auto and components | A mixed outlook as supply constraints may ease over the next few quarters. Demand may suffer due to rising petrol prices. |
Jason Leach points out that statistics abound showing that market corrections without recession are buying opportunities. Outside of recession, and after declines of 10%+, the US S&P 500 Index is higher one year later approximately 90% of the time with an average return of 25%+ (32 corrections since 1980 – source: LPL Research).
Data also shows that market corrections outside of recession around geopolitical tensions are buying opportunities. Outside of recession, only once since 1939 was the US S&P 500 Index lower one year after a domestic political or geopolitical shock (29 occurrences), with a median one-year return of 13% (source: Deutsche Bank).
Does this mean investors should be fully invested now? Not so fast, we think. Jason Zweig reminds us that glaringly obvious big fears, like the risk of nuclear war, can blind investors to insidious but more likely dangers, like the ravages of inflation. Second, investors need not only the courage to act (continue with regular investments in stocks) but the courage not to act—the courage to resist (not giving to the temptation of new products, hot IPOs).
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”
