In recent months since the start of the Iran war, bottom-up stock investing has completely outplayed the top-down approach. By focussing on individual stocks, investors believed they could ignore the overall economy. The belief was “As long as your company is doing well, you need not bother about the economy.” This has worked very well as individual stocks performed brilliantly while the overall economy was struggling. Many of these performing stocks are small-cap and mid-cap. This has worked very well for investors and fund managers focussed on this narrow space.
But, a slew of random events on the macro front is forcing a rethink among savvy investors. The war in Iran has disrupted global freight costs, broken supply chains, and destroyed demand. High oil prices have raised concerns about the impact of passing the actual cost increase on through a domestic fuel price hike.
Is our economy actually insulated from global volatility? Can we really buck the trend? While our economic resilience is definitely better than most other nations, it would be hard for us to buck the trend completely. We are seeing sharp spikes in commodity prices, which could significantly impact demand and margins in the current financial year. The impact will be felt across industries as competitive forces see a tectonic shift due to currency devaluation among nations.
India can reliably depend only on domestic consumption. Global economies are seeing sharp moves in currency. Devaluation in specific currencies is changing global trade dynamics. Clearly, disruption is set to occur at a scale previously unseen. Industries will see their competitive dynamics alter drastically because another country’s exchange rate depreciated. Global capital flows will further naturally shift as money moves into the safer currencies and markets insulated from higher oil prices. The recent spike in Korea and Taiwan is clearly resulting from soaring flows into these markets. The economies with safer currencies will most certainly attract more money. India is clearly not seen as one of these nations right now. After all, global investors will be loath to risk exchange rate losses that tarnish their investment performance.
This would mean that money could see short-term outflows from EMs with weak currency like India into other markets which look relatively more stable. A strong dollar makes it difficult to arrest FII outflows from India. But, this can change if the macros shift quickly. A quick end to the Iran war and the restoration of global oil supplies to normalcy can change things dramatically. This will definitely help stabilise and quickly recover the Indian macros.
Countries with improving macros will quickly bounce back from the war shocks. India will be one of the first to see macroeconomic recovery, leading to improved investor sentiment. But, in the near term, we could well have a scare. It is up to us to view this scare as an opportunity.
Meanwhile, bottom-up investing should duly factor in the changing top-down impact. When macros shift, many companies could see rapidly changing fortunes. We live in the most unpredictable of times.