The markets rose by 2% last week, despite all the negative macro indicators, and a 100% probability of a recession in the US next year (according to Bloomberg).
This month so far, the Indian markets have risen by 5%, from the levels seen at the end of September 2022.
And from their lows in June 2022, in just three months, the markets have rallied 15%. Have we turned the corner?
Not yet! Here’s what can go wrong!
Inflation
Inflation is rising and inched higher to 7.4% in September 2022. This risk hasn't reduced being a risk for months now!
Food inflation accounts for nearly 40% of the CPI basket, and this is what’s driving inflation higher. Prices of vegetables (+18%), spices (+17%), and cereals (12%) were all extremely high. This may put stress on consumption in the lower and middle-income groups.
As inflation continues to rise, the central bank will continue to focus on raising rates and slowing the economy down. In some ways, the recent IIP data showed a slowdown.
Economic slowdown
India’s IIP (Index for Industrial Production) declined by 0.8% in August 2022. Manufacturing was down 0.7% and could have taken a hit because of the reduction in export demand.
A slowdown was seen in the production of primary goods, capital goods, consumer durables and consumer non-durables, making the contraction rather broad-based.
The real bummer is in the economy slowing down, and inflation still being persistently high. That’s a disastrous combination, which sends equity markets into trouble (look anywhere in the West right now).
💡 Our View: Unlike other markets, India has been faring better because while India shared the inflation problem with the world, at least it was growing fast. But any increase in risk to earnings is likely to weigh on the markets, especially at current valuations. We continue to find comfort in buying on dips, and not look at rallies as a structural change in direction.