What is the overall outlook for global equity markets as far as calendar year 2022 is concerned? After the splendid 2021, should we moderate our expectations for 2022?
Last year was a combination of very positive factors for one we had monetary policy in the US and everywhere which was very supportive because of the stimulus due to Covid and that is going to go away. Tax policy is the same story. We had tailwinds last year and we are going to have headwinds this year. So with supply induced inflation going up, central banks are raising rates to combat inflation into a weak economy. It is a possibility that we are facing a recession in the later part of this year and that does not necessarily bode well for equity markets anywhere in the world.
Let us talk about emerging markets versus the developed markets. Which emerging markets are you interested in at the moment? Where do you see India positioned among others?
We are very cautious on equities in general and that includes emerging markets as opposed to developed markets, The valuations in emerging markets are extremely cheap compared to the US.
In the long run, we should benefit but in the current environment where we have risk on, there will be further downward pressure on emerging markets and that would include India. Now within emerging markets, in the long run, India is well positioned but is also facing the same problems as the developed world like rising oil prices, rising inflation and the central bank which is essentially between the rock and the hard place. Are we going to raise rates to combat inflation? If we do, we kill off the economy and if we do not do anything, inflation will go higher so it is a bit of a dilemma here.
Are you sitting on cash at the moment or you are investing in other asset classes?
If you want to be in equities, you are never 100% out. But if you go in there. you would have to look at mining, energy and given the fact that we are facing the possibility of a recession, you want to be in stock groups that do relatively well in times of recessions like consumer staples, utilities and healthcare which are relatively independent from the economic cycle. So industries defensive, may be more in cash than usual and I would also think that the US treasury bonds make some sense here. One can get some returns but it is more of a defensive.
Commodity prices are going up, They have been on the rise. What is your view over there? How can it impact margins of companies?
In the current situation with the war going on in Ukraine, there’s a lot of upheaval everywhere. We saw oil companies pulling out of Russia and so there will be less investment in energy. Essentially commodities are going up everywhere and those commodities which have the biggest impact are food and fuel. Both will continue to go up if we do not have a solution to the Ukraine political crisis very soon. Till then. We would probably continue to see relatively elevated oil prices. Energy stocks are really not quite reflective of these oil prices. I think there could be some upside potential there.
We have been going through a lot of these important cues. There was Covid, then it was all about what the Fed will do and now we have this geopolitical tension. What are the key triggers for global equity markets as we move into 2022?
Let us assume and hope that a political solution can be found for Ukraine but this whole thing will reverberate for quite some time and with Russia essentially being made into a pariah state. What will be the resolution and the end game there is very much in the dark. That is one thing we have to consider and the other thing we have to consider is that even before the war in Ukraine, the economy was already starting to slow down for lack of fiscal and monetary stimulus which we had last year.
I think that we are in some kind of a bear market right now, interrupted by possibly very sharp counter trend rallies and if there is a political solution for the Ukraine crisis, we will probably see a 10-20% rally easily but that does not mean it is sustainable. One can have these rallies from an oversold situation. The strategy would be to sell into these rallies, lighten up position more and position in defensive sectors.