Rupal Agarwal, Asia Quantitative Strategist at asset management firm AB Bernstein, said India faced a real challenge of stagflation–a combination of slowing economic growth and rising inflation.
Agarwal told CNBC-TV18 on April 18 that investors need to be more defensive in a scenario characterised by rising interest rates, a geopolitical crisis, higher crude oil prices and inflationary pressures.
Though global recession looks far-fetched, slower growth stoked stagflation concerns and could be a "real challenge" in India, Agarwal said.
"We define stagflation as a combination of higher inflation and slowing growth. We need not translate into an actual recession. We are not anticipating a recession to play out but it is more about slowing growth. Growth indicators are slowing for India but we are inching towards stagflation. Stagflation is not too far-fetched when it comes to India. With inflation moving much higher, it will become a real challenge," she said.
In a global market scenario characterised by uncertainty, the way to go for investors is to opt for high-quality sectors, Agarwal said, adding she was bullish on healthcare, staples, and technology.
"From a macro perspective, there are three larger concerns now. Key drivers for the market are a slower growth rate and higher inflation. Defensive sectors are tech, staples, healthcare, and utility," she said.
Explaining her current defensive position on the Indian stock market, Agarwal said, "We are getting into a space where stagflation is becoming a real possibility in India. Historically, stagnation times are more suitable for sectors like technology and staples which have been the most robust."
There are not enough catalysts for the markets to move higher, she said, adding India was experiencing an inflationary build-up.
India's retail inflation jumped to a 17-month high of 6.95 percent in March from 6.07 percent in February, according to data released on April 12 by the Ministry of Statistics and Programme Implementation.
The Reserve Bank of India this month lowered the economic growth forecast for the financial year 2023 to 7.2 percent from 7.8 percent projected earlier.
"We have been calling for a positioning which is more suitable for an environment where growth is slowing while inflationary pressures are still building. The fears of stagflation are coming to the forefront. This is something which is on the top of investors' mind and if we look at it from that perspective as well again you know it sort of indicates that one needs to be more defensive, you know, given where we are in the cycle," Agarwal said.
Asked whether investors should buy into dips in the stock market or pick between leaders and laggards, she said, "Focus should be on companies that are positioned in-between and ones expected to generate alpha in the next 1-12 months. These are the companies that fall out of the radar of investors. Companies most neutral in price action end up generating the most alpha."
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