We have never seen such a divergence between economic conditions and asset valuation. Most of the previous shocks were financial in nature, periods that led to corrections and a recovery. This time around it was health / medical in nature, and the world responded like it did in any crisis after the global financial crisis – providing cash / easy money. Thus, after a brief but sharp drop, global asset prices (all categories combined) are on the rise. Without complaining, it is interesting to try to find out what lies ahead.
From an economic point of view, the main risk is high inflation and the subsequent rise in interest rates, moving away from an easy liquidity environment. The global debate on whether inflation is transient or persistent is still not settled, and we can continue to debate this until the cows come home. However, rising interest rates as well as reducing and tightening monetary policies are expected to make all emerging markets, including India, nervous. Specifically from India’s point of view, although not immune to global environments there are a few things that stand out – i) we are still a partially convertible capital account country and, therefore, somewhat less affected by global shocks, ii) domestic sectors such as real estate and industry / Manufacturing / heavy investment sectors, which had hitherto been dormant over the last decade, appear to be on the decline develop and iii) the China + 1 strategy, if it manifests itself further, should help countries like India and some Southeast Asian countries as well.
With the type of returns seen in the markets in the recent past, it would be appropriate to tone down expectations of returns in the short to medium term. Starting from a top-down market, a bottom-up approach would be the required key and proper stock / asset selection and allocation would be a key differentiator. The rate of return and normality of growth are important indicators to watch, although high frequency indicators are improving and there is a slight increase in contact-based services and urban consumption. Rural consumption, it seems, has not yet fully recovered.
The recent emergence of Omicron is worrying. However, it is premature to assess its impact (transmissibility, severity and efficacy of vaccines), although after the first setbacks the world seems to be taking into account less disruption than before. You have to believe that the virus is here to stay and the best case scenario is that it goes from a pandemic to a less virulent endemic and life goes on as usual.
While the economy can be discussed and debated, in terms of the future, one should be aware of the changes taking place. I believe the pace of change over the past decades has been phenomenal and we have adapted well to it. However, the pace of change could be even higher in the years to come. We see so many new concepts, and some not so new, such as metaverse, blockchain, cryptos, NFT, artificial intelligence, machine learning, climate change – the list goes on. Whether any or all of these become ubiquitous or not, one thing is for sure: we need to be aware and nimble enough to embrace large-scale changes. Having the ability to adapt to it would be the main differentiator between superiority and mediocrity.
To illustrate in the investment world, the paper issuance of new age companies with emerging business models is happening with vigor. Looking at them through traditional lenses would make them non-investable. Nevertheless, their size makes it difficult to ignore them. This is just one of the dilemmas facing a rapidly changing environment. I would like to end with a quote from Dr. Wayne Dyer: “Changing the way you look at things and the things you look at are changing. “
(The author, Ajit Menon, is CEO of PGIM India Mutual Fund. His views are his own.)