If we were to look back at 2021 (or the last 21 months or so), the opening lines of Charles Dickens’ “A Tale of Two Cities” aptly describes the situation: “It was the best of times, it was the worst of times”, [it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair].
Never have we seen such a sharp divergence between the economic situation and asset pricing. Most of the earlier shocks were financial in nature, periods which led to corrections and recovery. This time around, it was health/medical in nature, and the world responded in a manner in which it has been doing in any crisis after the Global Financial Crisis — by providing liquidity/easy money. Hence, after a brief albeit sharp fall, global asset prices (across all categories) have been on the up. While we are not complaining, it is interesting to attempt to find out what lies in store.
From an economic standpoint, the chief risk is high inflation and the ensuing rise in interest rates, moving away from an easy liquidity environment. The global debate on inflation being transitory or persistent is still not settled, and one can keep debating the same till the cows come home. However, increasing interest rates as well as tapering and tighter monetary policies should make all emerging markets, including India, jittery. Specifically from an India viewpoint , while not immune to global environments, some things stand out — i) we are still a partially convertible capital account country and, hence, little less impacted from global shocks, ii) domestic sectors such as real estate and industrials/manufacturing/capex-heavy sectors, which were hitherto in a slumber mode in the last decade, are seemingly developing legs and iii) the China+1 strategy, if it manifests further, should help countries like India, and some Southeast Asian nations as well.
With the kind of returns seen from the markets in the recent past, it would be pertinent to tone down return expectations in the near to medium term. From a top-down market, a bottom-up approach would be the key requisite and right stock/asset selection and allocation would be a critical differentiator. Pace of return and normalcy to growth are important indicators to monitor, though high-frequency indicators are improving and there is an uptick in contact-based services and urban consumption. Rural consumption, it appears, is yet to recover fully.
The recent emergence of Omicron is a concern. However, it is premature to assess its impact (transmissibility, severity and effectiveness of vaccines), though after initial hiccups the world seems to be factoring …….