Moneycontrol Pro Panorama | Investors try to get a grip on fast changing macros

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The European Central Bank has hiked interest rates by an unprecedented, although not entirely unexpected, 75 basis points and even after that, is maintaining its hawkish stance. ECB chief Christine Lagarde made it clear that interest rates were far away from a place where they could bring inflation down to the 2 percent medium term target.

Today, EU energy ministers are scheduled to meet to discuss the energy crisis and may come up with proposals to ease the situation for both companies and industries. Yesterday, we had written about how Europe’s problems could hurt or benefit Indian companies in sectors such as metals and mining, auto components and gas distribution.

Today, Anubhav Sahu delves into a sector where European companies have made their name—chemicals. He discusses issues such as European chemical companies’ dependence on gas, which creates a feedstock challenge, while a supply disruption in Europe could cause trouble for companies which use these as inputs to make their finished products (downstream companies). This creates a list of potential gainers and losers among India-listed companies. Read on to know which ones and why.

Meanwhile, the macros continue to give the chills, with Nomura adding 25 basis points to its forecasts of how much the Fed will increase rates in the next two meetings. It’s now pencilling in 75 basis points in September and 50 basis points in November. While Goldman Sachs had turned bearish earlier, the consensus could be shifting to a harsher trajectory of rate hikes.

The quick pivot in scenarios is perhaps more unnerving than the actual events themselves. In a few months from now, one may be reading an entirely different macro scenario and that’s the real challenge for investors. Complex linkages in the economy already make it difficult to assess how they may affect companies’ earnings in normal times. Add volatility to it and the job becomes tougher.

Take metals, for example. At one point, not very long ago, the view was that an inflationary environment would be good for commodities. While inflation indeed stepped up, metals have swung low and how. The outlook for metals’ producers has soured compared to some months ago. But buyers of metals will be in a good mood, as their costs will decline. However, the short term may see some volatility as they may have higher-priced inventory, which could then lead to some inventory losses. They also have to figure out whether and how to pass on cost savings to consumers.

But not everything has turned cheaper. The dollar has gained by 5 percent against the rupee in the current fiscal so far, imposing an additional burden on companies with costs linked to import-parity prices. While export-oriented sectors may be seen to benefit, a global slowdown could mean major importing countries may not buy as much. Those rate hikes over there are meant to slow down consumption.

Higher interest rates may not hurt consumption immediately in India, but they will hurt companies, which borrow for working capital needs or even for capital expenditure. The effect will be felt more by the small and medium companies than the bigger borrowers.

Take the freight sector. A sharp fall in rates is good for companies and consumers, but signals a weakening economy, which is not so great news for companies and consumers too. Read Shishir Asthana's take on the developing situation.

Or, take what’s happening in the farm sector. While there were concerns about farm output due to erratic rainfall, there were hopes that rising prices would make up for it. Higher farm income could play a role in reviving the rural sector, benefiting companies in sectors such as FMCG, agri-inputs and tractors. But the government has clamped down on rice exports for fear of a spike in prices driving food inflation up. The government may be mindful of the larger political cost of cereal inflation or of interest rates going too high, if inflation trends up. But this now upends the case of healthier farm income based on higher crop prices, with categories under wheat and rice, the two main crops, under export restrictions.

Morgan Stanley has a view that domestic cyclical sectors may do well, with a strong earnings cycle driving a capex cycle. In today’s edition, Ananya Roy looked at what the manufacturing and services PMIs are saying and how investors are reacting to their message. She writes: “All in all, despite the promising PMI print, the markets are well aware of the risks facing the global as well as domestic economies. This explains why the Nifty has remained at near about the same level for almost a month now. This indecisiveness is representative of how investors have been on tenterhooks.”

While investors are well advised to take a longer term picture, it’s easier to form that picture when the near to medium term points in a certain direction. Right now, what seems certain is that nothing really is. This is not to paint a bearish picture, but to remain nimble when it comes to adapting to the rapidly changing data. That saying about crossing the river by feeling the stones seems apt for the times.

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Technical Picks: Action Construction, Axis Bank, Coal India,  TCS and  Copper (These are published every trading day before markets open and can be read on the app).