Inflation has become a key area Of focus although it was barely mentioned by experts until 2020 despite being an integral component of investing and valuation.
Indian markets are aligned to the US and other global markets, so if the broader global markets are falling, the same will be reflected in indian equities too. When inflation rises, consumer spending goes down, which then affects sentiment, and this is reflected in a stock market fall. Higher inflation means higher cost of living and therefore lower purchasing power. When inflation goes up, people earn less in real terms and that result in lower returns net of inflation. Higher inflation means higher rates of interest and that also impacts the cost of equity.
The CPI inflation that measures the extent of retail inflation in india has been on a consistent downtrend over the last few months. This trend has been more pronounced since the last monsoon which resulted in a bumper kharif output. The chart below captures the gist of the retail inflation story over the last one year.. The sharp fall in food inflation has been driven by two factors viz. Higher output and limited exports. The strong rupee also made imports cheaper and that also led to a glut in the economy. The government has already increased the msp of paddy and pulses and that is likely to increase the food inflation. The government is likely to encourage exports of pulses this year, which could further increase the price of pulses in india.
The price of crude oil has a very important bearing on the non-core inflation. Over the last few meetings, the monetary policy committee (MPC) has been dwelling on the issue of non-core inflation as the major risk factor for overall inflation. But with the US and Libya flooding the global market with oil, the overall non-core inflation is likely to remain tepid during the year.
The two-wheelers segment is not going to revive anytime soon. Maybe in the runup to the festival season in October, November we can expect some sort of revival there.
The next quarter typically is the best quarter in terms of demand for cement companies and typically they carry an inventory. So next quarter will see the worst impact and during the monsoon, typically the demand becomes sluggish. So the next three to six months will be somewhat tough for cement companies and in this timeframe, we will get opportunities. So longer term i am bullish, right now we are not holding these stocks but i will be looking to buy large cap companies like Ultratech cement specifically if prices weaken significantly from the current levels.
Also Check : Best Defence Stocks in India 2022