What we know and what we don’t know

iceberg with above and underwater view taken in greenland

At any point in time, there will be many knowns and many unknowns in the market. That’s why we have bears and bulls. Bears focus on the negative knowns and worry about some likely negative triggers. Bulls look at the positive knowns and ignore potential negative factors. Only time can tell which perspective was right. There will be too many uncertainties in the short run; but there will be more clarity and certainty about the long run.

What are the unknowns plaguing the markets now?

Globally, the biggest concern is the monetary tightening by the Fed. Inflation in the US, and in most parts of the developed world, is at 40-year highs. Inflation has proved to be more entrenched and persistent that thought earlier. Now, the only way inflation can be tamed is by raising interest rates and slowing down the economy. The risk is that in this pursuit of inflation-containment the Fed might push the US economy into a deep recession. Such a hard landing of the world’s largest economy stands the risk of pushing the global economy into a recession since the other two engines of global growth- China and the Euro Zone – are slowing down sharply.

This is the biggest unknown plaguing the global markets now. There are different views regarding this. Many believe that a US recession is now unavoidable. Some are optimistic that the Fed will engineer a soft landing for the US economy. Many believe that even if the US tips into recession, that would be short and shallow.

What will be the terminal Fed funds rate at the end of this tightening cycle? 4 percent? 4.25 percent? 4.75 percent? Again, there is no agreement on this.

When will the Ukraine war end? In the early days of the war the consensus was that it will not last beyond a few weeks. Now, it appears that even Mr. Putin doesn’t know when it will end.

Now, let us come to the knowns. We know that India will be the fastest growing large economy in the world this year and next. GDP growth of around 7 percent in FY 23 and 6.4 percent for FY24 are achievable for India. India is in an expansionary phase of the business cycle. Bank credit growth is at a 9-year high and the economy is on the cusp of a capex cycle. The twin deficit problem – the excessively leveraged corporate sector and the stress in the banking system caused by high NPLs and low credit growth – are behind us. Corporate profit to GDP is on a clear uptrend. In brief, as the IMF chief said, “India is a bright spot in the global economy.” It can be safely argued that the Indian economy and the Indian market would outperform even in a challenging global environment.

A few months from now, there will be greater clarity on the unknowns. The Fed would stop monetary tightening. We will have greater clarity on where the US economy is headed. Perhaps, the Ukraine war may be over. All wars have ended.

Even though there is some fog on the windshield, there is clarity on the road ahead. Irrespective of the short-term challenges, India’s corporate sector is doing well. There are segments and companies that are unaffected by the hawkish Fed, the Ukraine war, the Euro Zone slowdown, and the Chinese property market crisis. So, common sense tells us that remaining invested and continuing to invest in India would pay rich dividends.

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