While it is prudent to brace for some more short-term
weakness, the key question is whether investors should run away amid the
softness or invest more amid correction. Investors should use this opportunity to buy on decline
and the reasons are not hard to find.
Unlike the past
when FIIs used to rule the bourses, the long-term journey of Indian
markets will ride on domestic liquidity. India’s changing demographics
with a young population having no social security benefits coupled with
negative real interest rates, augur well for domestic inflows to
equities. The record number of new demat account openings and the
soaring monthly contribution to SIP (systematic investment plan) stand
testimony to the same. This domestic liquidity should provide downside
support to equities.
On the other hand, earnings, which is the ultimate driver of equities irrespective of myriad noises, is
looking stronger than ever before. The revival from Covid’s deadly
second wave has been sharp and swift in India. Growth is looking up and
the impact of Covid has been positive for organised players who have
pushed efficiency to the hilt and managed their houses well despite
extreme gross margin pressure due to a rise in raw material prices.
Do not expect any major negative earnings impact on Nifty in the next
couple of years, as the two heavyweight sectors, namely financials and
technology look to be in fine fettle. Riding on recovery and better
asset quality, we expect financials to manage the marginal pressure on
interest margins. The unprecedented demand for digitisation and the
gradual easing of talent shortage augur well for technology earnings,
and the currency depreciation could be a feather in the cap. The
diversified heavyweight conglomerate Reliance Industries should continue
to benefit from recovery in all its businesses. With very little weight
of cyclicals, we rule out meaningful downgrade to Nifty earnings.
Courtesy : Finshots
Food for thought...I thought you might want to ponder over...
What is the Inflation data really telling us?
Last week, everybody had a chance to look at India’s
Wholesale Price Index for November and lo and behold, it was at a
30-year high! So in today’s Finshots, we explain inflation and see what
the numbers are really telling us.
Economy
The Story
To
understand inflation in India, we need to go over a couple of things.
First, there’s the Wholesale Price Index (WPI). It measures how prices
are changing at the wholesale level — when goods are traded in bulk
between businesses. Then, there’s the Consumer Price Index (CPI). It
tells us about the change in prices of goods and services that we
consume on a daily basis.
In other words, WPI affects businesses
and CPI affects consumers. And while there is an obvious interplay
between the two, they offer distinct insights. Take for instance India’s
WPI figure at the moment. It stands at a whopping 14.2% — meaning
prices have increased by a staggering 14% in November 2021, compared to
the same period last year. In fact, we haven’t seen such highs since 1991!
And
while some people would brush this off as an aberration, that
assessment isn’t entirely accurate either. WPI has been heading upwards
for a while now while CPI is still hovering at a modest 4.9%. Sure, the
CPI figure isn’t something to boast of either, but it’s still not rising
exponentially like the wholesale price index. Which means we need to
look at this and ask — “Why the divergence?”
Well, truth be told,
there’s still a lot of debate on why this is happening. Typically,
whenever WPI and CPI diverge, everyone points to how the indices are
constructed. Let’s take food for instance. 50% of the CPI is
attributable to food prices alone. However, in the WPI index, food
contributes only 15% to the final figure. The largest weights are
assigned to “manufactured products”. This includes a lot of things that
businesses use — like textiles, chemicals, cement, metals, etc.
So, a quick reading of the numbers will tell you that it’s the raw materials doing all the damage. And one popular theory
explaining this figure goes something like this — Businesses are
recovering faster from the pandemic. So, they’re demanding raw materials
to produce more goods. And more demand inevitably leads to higher
prices. But there have been disruptions in the supply chain as well. And
when these disruptions don’t ease quickly, prices start climbing some
more.
However, if businesses in India are experiencing high
prices, why aren’t they passing it along to consumers? Why aren’t we
feeling the pinch?
Well for starters, we are feeling the pinch.
FMCG companies have slowly been hiking prices. Paint companies are
revising their pricing structure. And cooking oil is on a tear. However,
they haven’t been able to pass on all of their costs because they’re
still tentative about demand. If people are still holding on to their
purse strings, they have little incentive to hike prices. If they go
against the grain and hike prices nonetheless, it may affect their
business some more.
But make no mistake, companies can’t keep absorbing costs forever. Even on the services side (classified under miscellaneous), prices are rising.
Telecom companies have hiked prices by 25% after a long hiatus.
Recreation and amusement inflation is also at its highest since 2012.
And restaurants are also taking a good hard look at their prices.
However,
these don’t reflect all that well in the CPI, because as we noted, food
and beverages dominate that index. If you remove food & beverages,
as well as fuel, and measure the variation in prices elsewhere (called
core CPI) — then you’ll see that figure is at a 5-month high — at 6.08%.
So prices are rising across the board. It’s just that we have to be a
little bit careful in drawing our conclusion from CPI and WPI index at
such a time.
And here’s hoping that WPI inflation eases up in
2022. Because if it doesn’t it is likely that we will feel the pinch
much harder soon enough.
