Record stock market highs but whither to from here?

Record stock market highs but whither to from here?

RBI has lowered their GDP growth projection for the Indian economy to 9.5% from 10.5%Record stock market highs but whither to from here?

Credit: PTI Photo

After a disastrous few quarter(s), US vaccination rates moved stock markets to a new ‘risk-on’ mode brushing off inflation fears, anti-trust action against tech giants and even minimum corporate tax agreed to by G7. Notwithstanding Delta variant and Delta Plus (which pushed most major cities in India into intermittent lockdowns of varying degrees), the Nifty also moved to record highs while flight-to-safety assets like government bonds and gold languished.

However, this recovery has not been uniform – while the US and Chinese economies are well on the mend, Europe and broader emerging markets have been lagging. With growth momentum peaking, most investors are rightly asking if this is the time to book profits or wait on the sidelines. Notwithstanding sector-specific recovery in India, some of the boom, particularly in the Mid and Small cap space has been because of high liquidity and easier credit -mostly RBI sponsored.

RBI has also lowered their GDP growth projection for the Indian economy to 9.5% from 10.5% while targeting 5.1% inflation on the back of a 2 trillion hit to the economy from the recent Covid-19 wave. On the upside, GST revenue in the current financial year have been better than last year “infusing optimism that the revenue base for states will be protected with a growth rate of 7%, and it may result in some surplus to compensate for the shortfall in the previous year”.

Globally, US Fed driven liquidity has been a contributing factor in stock market boom (or bubble
depending on who you ask). Both RBI and the Fed seem to indicate that they will allow some inflation and keep the economy heated. Given that scenario, even if there were to be extended sporadic lockdowns, risky assets like equities are likely to see increased interest from investors world over. 

Furthermore, after $1.9 trillion in pandemic relief, President Biden has proposed over $2.5 trillion in infrastructure spending and around an additional $1.7 trillion for childcare and education, among other initiatives. Despite Republican opposition, this is likely to pass and give a further boost to the US and world economy (as a knock-on effect). China too has the pandemic in its rear-view mirror and according to a JP Morgan report, be looking at growing 5-6% towards the end of 2021 on the back of adequate vaccine supplies and inoculation rates.

Overall, expected US growth and developments in China may deliver an impetus to further global GDP expansion but it is equally likely other nations will continue to offer investment opportunities for some more time. Within that context, innovation will continue to provide a kicker to broader equities. As Electric Vehicle adoption increases, fintech continues to disintermediate traditional asset managers, banks, and brokers alike and promises of mRNA start to bear fruit in areas other than Covid vaccines, the innovation-driven fund may see increased interest.

Pure equity portfolios rarely survive market volatility and holding diversified assets is a good idea. With RBI comfortable with 6% 10-year yield and higher inflation (for the moment), it may be prudent to build incremental bond positions (selective corporate credit and Gilts) over time. However, balanced portfolios are no longer 60:40 debt-equity ones and require additional asset classes to manage risk while improving returns. In addition to diversifying risk, inflation hedge, and income are often important features of a well-constructed portfolio. Rebounding real assets both in real estate and infrastructure are benefiting from reopening offices and returning business/leisure travel and could provide such benefits via listed REITs and InVits. While these ideas are a general guide and outlook, specific plans are best executed considering investors particular circumstances and should be factored in as global and local markets pivot.

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