It will be a fortunate for the market if manmade headwinds to inflation reverts


Volatility persists, but Nifty 50 index is showing support at the level of 15,650 to 15,750. Two times in March and four trading days in May, index has respected this range to close above. Market may have grossly well factored the hostile changes happening in the financial world from a hawkish monetary policy to slowing economy. The sell-off during last one & half month has technically taken the market to oversold territory. We can assume for a bounce in the short-term however, sustenance will depend on the next course of monetary actions expected in June.

During the week, positive performance of Chinese market; especially technologies, aided the domestic stock market. Foreign brokerages have upgraded the outlook of Chinese technology sector due to attractive valuation, hope of ease in regulatory crackdown and fall in covid cases. This is also positive for the world because stringent economic & covid measures had impacted performance of Chinese companies and supplies from world’s largest exporter & emerging market, increasing inflation issue & equity performance.

It will be fortunate for the market if structural headwinds to inflation reverts. In 2022, inflation established deeper due to Russia-Ukraine war and Covid zero-tolerance policy adopted by China. Both these factors dearer the availability & supply of essentials from raw material to final products. If both the points relax, for which we have early signs, it will be a big favourable surprise for the world equity market.

War can subside further, which is possible as focus has shifted to the eastern part of Ukraine-Russian territory and exports from Ukraine is expected to improve. Secondly, covid cases in China has reduced, opening the possibilities of relaxation in public restrictions & increase in capacities. If the factors stabilize, it will be a drastic ease in inflation forecast and provide legroom to central banks.

Today the biggest challenge of the world economy & equity market is hyperinflation & hawkish stance taken by central banks. During the earlier quarters of pandemic, when the inflation started to improve from the negative bottom, it was an essential element of economic growth. And then, when inflation started to rise into unterritorial range, it was assumed to be transitory. The central banks got it late to realize that inflation have incorporated deeply into the market, requiring drastic steps.

High inflation did not impact performance of equity market till the central banks started to attack inflation and initiate aggressive policy to cut quantitative support.

Heavy FIIs selling is impacting the performance of domestic market. They are on a selling spree and foreign net equity outflows are at Rs 1,57,556 cr. in CY22, till 18th May 2022 compared to inflow of Rs25,750cr in CY21. Positive developments regarding war, increased supply from China and eventual moderation in inflation forecast will help to change FII’s stance. Value stocks should continue to perform well in this period, supported by the moderate valuation, healthy cashflows and stable business cycle, which is a challenge for growth stocks during high interest rates & inflation cycle.

First published in