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Inflation is transitory, not a threat to economy and will boost companies' profits

In the US, inflation is at its highest since 2008 and stocks are rallying to fresh highs due to increased profitability and demand outlook.

June 13, 2021 / 09:18 AM IST

After it made decent gains following positive economic data and Reserve Bank of India’s policy announcements, the market was expected to remain resilient in the short to medium term supported by sliding coronavirus cases and global risk-on strategy. The domestic equities did extend gains on hopes of easing restrictions and the Centre's COVID-19 vaccination procurement policy. Volatility, however, returned midway due to mixed global markets following concerns over rising inflation and central banks’ policies.

Globally, inflation is back after a long time due to a combination of a pandemic-hit low base, rising consumer demand, spiralling wages in the face of low staff availability and rising energy and commodity prices.

The US CPI for May was expected at 4.7 percent but the actual figure was much higher at 5 percent. This is expected to go up to 6 percent in June.

Historically, the global market has displayed high sensitivity to rising inflation pressure with a negative effect on equity assets. In spite of the weak outcome, this time the market did not show any negative effect.

The antidote is the Fed's accommodative statement in the last policy, saying that inflation is transitory in the coronavirus-hit economy. We cannot expect the same in the next cycle when the economy returns to the growth path.

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The domestic market also witnessed profit booking in between due to dull European markets ahead of the European Central Bank (ECB) meeting. ECB is expected to continue its bond-buying programme to support a recovering economy. Due to the attractive outlook by key central banks, the market maintained its comfort level.

Companies, especially those in consumption, commodities and online businesses, are benefitting from an increase in prices with higher revenue. The cash flow to sectors like metals has increased—so high that their balance sheet position has improved with a big fall in debt.

The economy was in dire need of inflation to move out of the rising risk of deflation. In the US, inflation is at its highest after 2008 and stocks are rallying to fresh highs due to increased profitability and demand outlook.

The domestic market is focusing on the stocks and sectors which will benefit the most from unlocking. Investors should move their portfolio mix to the companies that are oriented towards consumerism, be it staples or discretionary. Others like infra and capital goods will also benefit.

At the same time, please note that valuations are high, so value-stock picks will be the best way to add stability to the portfolio on a long-term basis. In that, FMCG, banks, PSU, media and auto would be safe to invest and outperform the market.

We may need to cut weight on heavily valued sectors like IT, pharma, consumer, metals and telecom though they continue to have a good long-term outlook, especially IT and pharma. So, they can hold a fair chunk of weightage, which can be increased during the period of consolidation as they are the biggest winners from the pandemic and post-pandemic period.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Vinod Nair is the Head of Research at Geojit Financial Services.
first published: Jun 13, 2021 09:18 am

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