High uncertainty is the new normal. Projections and predictions become increasingly difficult during times of heightened uncertainty. The Fed Chief Jerome Powell in his July policy announcement said, “No one knows for sure where the economy would be a year from now”. This candid statement from the world’s leading central bank with its formidable economic think tank is a reflection of the uncertain phase the global economy is passing through.
The Covid-19 pandemic, the consequent unprecedented lockdowns and its impact on economies, the unconventional monetary response to the Global Recession of 2020, the massive fiscal stimulus that most governments particularly the developed ones implemented, the surge in debt levels of the developing economies all have combined to create an age of high economic uncertainty. This confusion got confounded with the unexpected developments on the geo-political front with a totally unexpected war in Europe. And now, Taiwan has become another area of concern. China is flexing its muscles on Taiwan and if the situation deteriorates, the consequences can be bad.
What should investors do in this heightened uncertain times?
We can make some realistic assumptions and move forward. There are certain trends on which there is less uncertainty and greater clarity.
• Global growth is slowing down. The slowdown will continue in 2023.
• Global slowdown will impact growth in India too, but much less.
• There are clear indications of the beginning of a cycle of economic expansion in India.
IMF has downgraded global GDP growth to 3.2 percent this year and 2.9 percent in 2023. All the three engines of global growth, US, the Euro Zone and China are slowing down. India cannot escape unscathed from a global slowdown.
However, there is a near consensus that India would be the fastest growing large economy in the world in 2022 and 2023. IMF projects India’s growth at 7.4 percent this year and at 6.1 percent in 2023. If we achieve this projected growth, that would be a commendable achievement in the deteriorating global economic environment.
FIIs turning buyers in India, after relentless selling over nine months, has to be seen in this context. Foreign portfolio flows are likely to be more country-specific. Rather than allocating more funds to Emerging Markets, FIIs are likely to allocate more funds to outperformers like India. Therefore, the current trend of FIIs turning buyers in India is likely to continue, unless there is a continuous surge in the dollar.
Markets will continue to remain highly volatile in the nearterm. We don’t know when inflation in the developed markets will come under control. If the ongoing monetary tightening succeeds in containing inflation without pushing the US economy into a recession, that would be a bullish scenario. On the other hand, if the Fed turns more aggressive in its monetary tightening and if the US economy is pushed into a severe recession in the process, globally markets will turn bearish. Now, we don’t know which of the two scenarios will play out.
Investors should respond to these uncertain times with some commonsense investing. History has taught us that it makes sense to remain invested in the market. In these uncertain times, there is safety in high quality large-caps. We also know that mid and small-caps will outperform in the long run. The best strategy to profit from this is to invest in this segment through mutual fund SIPs. Stay invested and continue to invest systematically.