October US CPI inflation coming at 7.7 percent against expectations of 8 percent turned out to be a turning point for stock markets globally. The 0.5 percent dip in October inflation print from 8.2 percent in September is significant. This might turn out to be the signal that inflation has peaked in the US and the worst is behind us in terms of monetary tightening by the Fed. There are optimists who believe that the Fed might pause after a 50 bp rate hike in December.
The market response to inflation data was surprisingly significant. On November 10th, responding to the positive inflation print, Nasdaq had a monstrous rally of 7.35 percent, and S & P spiked by 5.5 percent. The crash in the US dollar index from the recent high of above 14 percent to 108 percent also was a huge move. These kinds of violent moves are a reflection of the uncertainty in the market, particularly regarding the course of inflation and interest rates. Going forward, in the near-term, the global market trend is likely to be swayed by the US inflation data and the Fed’s response.
It is important to understand that it is too early to celebrate the marginal downtrend in inflation. The Fed chief Jerome Powel had warned in September that “the historical record cautions strongly against prematurely loosening policy.” He had further categorically stated that the Fed will pursue a hawkish policy “till the job is done.” Therefore, equity markets will wait for more signals of inflation cooling off.
Meanwhile, investors may follow a wait and watch policy and look for opportunities that can be thrown up by the sharp moves in the market. Indian economy is resilient even amidst the slowing global economy. India’s corporate sector is highly deleveraged now and the banking system is in the pink of health.
There are signs of capex revival in the economy and credit growth is impressive. Banking stocks have positively responded to this healthy trend, but the sector looks good for a few more quarters of impressive growth. Telecom, which is a near duopoly in India now, is another segment that looks strong, particularly in the context of the 5G rollout. Capex signals augur well for the capital goods majors. Select autos, too, are on a strong wicket. From a long-term perspective, IT appears good for investment. These are the promising segments. An important trend in the market is that premium segments, across the board, are doing well. This is because of the ‘K’ shaped recovery in the economy. The upper and middle income segments are doing well. The bottom of the pyramid is yet to recover fully. This is evident from the low volume growth of FMCG companies. The premium segment in automobiles is doing well while the entry segment and two-wheelers are struggling. This premiumization has implications for investors.
So, investors can utilise weakness in the market to buy high quality stocks in fundamentally strong segments. When times are uncertain and valuations are high, the safe strategy is to focus on the quality of business. High quality stocks in promising sectors will always rebound after market corrections. Adopting a ‘Buy and Hold’ strategy focussing on quality is a sure recipe for investment success.