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Monthly Digest – October 2021

By Avatar photoKedar B | Edited By Kedar B | Updated on September 22, 2023

The specter of macro economic risk is starting to raise it’s head again; slowly, but steadily. For the first time since the inflation scare came to the fore, the US Fed is grudgingly acknowledging that it might turn out to be a problem sooner than anticipated. The container shortage across the world continues, the Baltic Dry Index has broken out of it’s decade long trend. The US 10 year yield has crept higher by 20-25 bps while Brent crude hit USD 80 per barrel. 

India’s macro economic situation continues to be the best it has been for a long time. Forex reserves at USD 600 Bn+ and a steady INR with an accommodative central bank policy looks far better compared to the 2013 period. However, Brent crude price crossing and staying well past USD 80 for some time will start introducing doubts on how longer the dovish policy on rates can continue for.

There is a whole segment of investors who will tell you that macro cues should not influence the decisions of bottom up equity investors. I agree, macro developments should at best be an auxiliary input to stock pickers who invest with a 5+ year horizon. What these investors do not tell you is that changes in macro economic expectations influence asset allocation decisions for those that manage large sums of capital. Over the short term, equity markets react more to capital flows than to anything else. Earnings and business quality won’t matter for much if USD 30Bn flows out of Indian equity market in 45 days. 

Give macro economics the respect it deserves, base your asset allocation for the next 12 months on this. But do not obsess over it and don’t be foolish enough to predict things. If interest rates in India were to go back to 8% (for the record I don’t think they will), the 60+ PE multiples we take for granted today will look like a joke. Even if this scenario does not have a high probability of materializing soon, we still need to keep our eyes out for this possibility. Think about possibilities but act based on ground realities. 

Home loan rates in India are below 7% and this is leading to some interest in the much beaten down real estate stocks. My preference is to play this through a proxy like building materials rather than play this through a real estate developer. Given a choice, I prefer to invest into segments with clear market leaders in a favorable industry structure. Of course at the right price, not at any price. 

By the time the November newsletter reaches you, we will have a sense of how Q2 results are panning out. The earnings profile is likely to be good if not great, but that is already priced in. The commentary from managements across all industries has been positive, some of them are putting their money where their mouth is through healthy capex plans. Things are looking good on the private capex front after a long time in India.

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