Are you prepared for the perfect storm coming our way ?
Contd from previous issue
Well, Aiyar does have a point. As a matter of fact, a lot of experts across the globe share a similar view.
They don't agree the current high inflation is transitory. They believe it's going to be with us for a fair amount of time.
The Indian stock market however is showing no signs of being worried about the coming inflation tsunami.
The Sensex is down only about 4% so far this year. This is very low given how the stock market moves up and down in anticipation of a big macro development.
So if there is really a big inflation storm brewing, the index should have been down much more. This also contrasts sharply with the US benchmark index, the Dow Jones. It has already erased 7% of its gains in the year so far. The tech laden NASDAQ has done even worse, down almost 20% since the start of the year.
To be sure though, the next few quarters don't look that good at all as far as the Indian stocks are concerned. There's every chance the markets may fall further if the situation doesn't improve.
But why do the next few quarters look challenging for India Inc ?
Well, this is because big earnings downgrades await some of the largest Indian companies after the heady growth seen in FY21 and FY22.
The initial batch of corporate results haven't been quite encouraging to be honest and whole lot of downward earnings revision could be on the anvil.
If an article in Fortune India is to be believed, analysts now expect Nifty EPS for FY23 to be around 15% lower than the current forecast of Rs 873. This in turn may translate into a flat or single-digit growth for Nifty companies' overall growth in FY23.
Mind you, the markets are not attractively valued anymore whichever way you look at it. If not significantly overvalued, they are certainly slightly overvalued.
Therefore, any earnings downgrade is likely to lead to a sizeable correction in the near term. We already saw what happened to Infosys when it missed street's estimates.
A similar fate can befall other large companies too. Most companies have enjoyed massive tailwinds of lower interest rates as well as lower energy and material costs over the last couple of years. However, now with the same factors turning into headwinds, growing the topline as well as bottomline at a decent rate is not going to be easy.
Therefore, with both stock prices as well as earnings growth at a risk of heading south, a significant correction is possible.
Isn't this a Catch-22 situation?
If high inflation is coming, then stocks should be your best bet to protect yourself against its ill-effects. But the stock market itself is finding it hard to sustain the momentum it's in real danger of a significant correction.
So what is an investor to do?
To be honest, there is no, single solution to this problem.
But what I've realised over the years is that an investor's choices in such situations are driven mostly by his dependence on his capital for managing his day-to-day expenses.
To be contd