Rarely has Charles Dickens’s line about ‘It was the best of times, it was the worst of times’ been such an apt description of the year gone by. The rest of the line brings out the full flavour of the quote: “It was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.” It was, prosaically put, a year of contradictions.
For many whose near and dear ones were laid low by the virus, it was truly the worst of times. For those who lost their jobs or scratched out a living thanks to the generosity of the rural employment scheme, it was a season of darkness. For many, SPACs and meme stocks and cryptocurrencies and NFTs were symbols of an epoch of incredulity, but for others they were the tokens of an epoch of belief. For the stock markets, it was the best of times.
Thursday saw the S&P 500 scale new heights, as worries about the Omicron variant abated on reports that it was much milder than Delta. But we should be careful not to underestimate the virus, and we urged the government to go in for booster doses here and here.
It isn’t just Omicron that is responsible for the wild swings in the market. The markets are worried about what will happen once they are denied the massive injections of liquidity that have been provided by central banks in the developed economies for over a decade, especially after the pandemic. That liquidity buoyed asset prices and encouraged investors to buy every dip. As Crossborder Capital said, “Amid all the excitement and confusion of the last two years, the ascent of the stock market and the continued robust health of all asset classes has boiled down to three words: liquidity, liquidity and liquidity.” Goldman Sachs has said global inflows into equities surpassed $1 trillion in the past year, exceeding the combined total from the past 19 years.
But now, inflation is on a tear and central banks are being forced to turn off the taps. What should investors do in this novel scenario? That is the question gnawing at their nerves.
We urged investors to be stock and sector specific, guided solely by the earnings outlook. We also recommended that they shockproof their investments, paying close attention to their asset allocation.
Corporate earnings depend on economic growth and the million-dollar question, asked by RBI Deputy Governor Michael Patra at the meeting of the Monetary Policy Committee (MPC) earlier this month was: “Has the global recovery peaked prematurely, leaving behind the scars of the pandemic?” The answer to that question will determine whether the central banks are able to pull off a miraculous soft landing for the global economy and markets next year.
Note that, as this FT story (free to read for MC Pro subscribers) says, US financial conditions have remained easy despite the hawkishness, which has supported stocks so far. But what happens when the taper is finally done? And although growth continues to be strong, will inflation nibble away at it? Note that in the US, real disposable personal income is down for a fourth month in a row as inflation eats away compensation gains. Our own Economic Recovery Tracker is giving out mixed signals, as the festive bounce fades.
Madhavi Bokil, senior vice-president, credit strategy, at Moody’s Investors Service, told us in this interview that continuing supply issues could keep inflation high. That leads to the obvious question whether gold is still an inflation hedge and safe haven.
Inflation may also take the sheen off the FMCG sector’s charm as a defensive shield. In this context, we took a close look at Godrej Consumer Products. The government believes that trading in agricultural products on the commodity exchanges is to blame for food inflation, a view we comprehensively debunked. But state elections are due early next year and we have to deal with political risk, as we saw in the case of the draft bill to amend the Electricity Act.
Nevertheless, the government is doing its best to boost capex, which should be a boon to select construction stocks. The recent sell-off made us look at stocks such as M&M Finance, Hyderabad Industries, Bharat Electronics and Mrs Bectors Food Specialities, apart from battery makers, to see whether they are in deep value territory.
In the policy space, we commented on the Centre’s new scheme for semiconductors and whether India will be third time lucky; on the over-regulation in the data protection bill; and on Sebi’s mollycoddling of investors on IPO valuations.
In our Crypto stories, we told investors about things to keep in mind while investing in cryptocurrencies and how to create a crypto portfolio that matches their risk tolerance. In Start-up Street, we looked at Indian edtech firms benefiting from the crackdown in China and at the avalanche of money from venture capital and private equity pouring into the Indian crypto industry. Our Algo Rhythm section considered the reasons why algo trading now accounts for half the trading volumes in the Indian markets.
Will the New Year bring the markets a Dickensian spring of hope? We couldn’t have put it better than this Lex column in the FT.
Compliments of the season,