Inflation Impact on Global Markets and Resiliency in India
November 2, 2022 marked the fourth consecutive increase in interest rates by the Fed, the Central Bank of the United States. In a span of six months, the Fed has raised interest rates four times, by 75 basis points at each increase. The Fed, which attempts to maintain an annual inflation increase of around 2%, is adjusting interest rates as a response to the threat of high inflation, and the ongoing geopolitical situation has definitely added to this pressure. Declines in agricultural imports from Ukraine and sanctions on Russia have made oil, natural gas, fertilizers, etc. difficult to procure, and these conditions are directly impacting the Consumer Price Index (CPI), looming higher inflation rates.
While the steady employment rate amid heavy supply chain issues has strengthened the Fed's strategy of raising interest rates, the ever increasing input costs and wages are adding to the stress on an already stressed economy. Stable prices are the backbone of a healthy economy; they enable a moderately accurate forecast of the future, help identify growth opportunities via pricing and long-term deals, and in turn maintain the spending cycle. However, rising inflation threatens this stability, creating uncertainty in pricing and disrupting the spending culture.
These waves of disruption are not just impacting US households, they are creating foreboding in the US stock market. Inflation plays a key role in valuation as higher rates mean a higher bond yield, which in turn leads to lower corporate profits. While the infusion of trillions during Covid gave a boost to the economy, the increase in interest rates is definitely eating away at the liquidity in the market. The market which has fairly rebounded from covid impact & the geopolitical crisis, is currently riding in suspicion over its tenacity to hold true against an economic slowdown & possible recession. The rebound is notoriously tagged as a bull market rally, adding to the scepticism behind the current US stock market. Precarious liquidity positions, negative economic trends, weakening earnings, and a possible recession are all pressuring the stock market.
Inflation in UK and its impact on its on Sterling
Similar trends can be seen in the UK as well. The impending energy crisis, clubbed with the ongoing political drama in the UK, has compounded its impact on the UK stock markets, which were already influenced by existing geopolitical tensions, supply chain issues, and rising inflation concerns. While the hope of Brexit was that the UK would create its own legacy of growth, Sterling, the British currency, is definitely showing a different picture. While the dollar continues to strengthen, mainly due to the interest rate hike by the Fed, the pound continues to bear the brunt of policies and the chaos of its changing leadership. The pound plummeted by 20% this year against the US dollar, recording the newest lows since 1985.
China‘s Growth Outlook
China, the nation that has enjoyed a steady growth outlook against its peers, is for the first time in 30 years looking at a downgrade. Zero Covid tolerance, lower demands, unemployment, and climate change impacts have impacted its growth outlook. With one of the worst heat waves in certain regions and extreme floods in others, China is battling an energy crisis due to climate change. Its zero covid policy, causing curfews and lockdowns, has impacted output, production levels, and spending power. All these factors culminated in the lower forecast for 2022.
India’s Growth Outlook
India, with the third largest purchasing power, has not been unscathed from these economic conditions. With the rupee reaching new lows against the US dollar each day, India faces the threat of rapidly rising living costs. With inflation in India catching the unfortunate upward trend & the central bank of India - RBI raising interest rates to combat the same, the stocks are enduring heavy intimidation. This is reflected even in the startup economy of India. The tides are changing in the startup world, selective funding & devaluation risks are haunting the new businesses. With startups hounded with counter questions involving long-term sustainability and cash generating capacity, many are not able to raise the next levels of funding. Layoffs, scaling down of operations, and closures are now turning from alarming outliers to the outcome of many startups.
India’s Growth Outlook
Wealth management firms all over the world are deeply concerned with the inflationary trends.
However, the Indian equity market seems to have bounced back to outperform its global counterparts. While the market fervently responded to the geopolitical crisis, the Indian benchmark seems to have held its ground against the impending inflation scare, according to financial advisors. This makes one wonder what is it that India is doing right when the developed countries are struggling?
While the worldwide stock markets echoed on the possibility of negative growth, growing inflation & possible recession, emerging markets like India have clutched on to their highs. Nifty 50 has surpassed the 18,000 threshold and is facing a lot of resistance at these levels.
This is reflected in the investing appetite of domestic and retail investors as well. With record outflows of FII investments, a reaction to the US dollar appreciating due to interest rate hikes, the domestic investors have been able to absorb the surplus with little to no correction.
A steady inflation over a short period actually motivates businesses and can, in the long term, prove to be a boost to the economy. In the long run, equity returns can outperform the damage done by inflation, provided there is a positive growth outlook. One of the key factors that sets India apart from its peers is the growth prospects it offers. A stable government, positive growth trends, high Gross Domestic Produce and increasing capacities are few of the key factors backing the Indian equities resilience. While predicting the market is a game in itself, India definitely wins the bets as the golden performer at least for the coming 3-5 years.