The rising commodity prices have taken the markets by surprise. Cocoa, coffee, crude, and a host of other commodities have risen sharply in the past two months. The markets were positioning themselves for a moderation in inflation and the recent events have been a rude shock.

This financial year may well turn out to be the exact opposite of the previous one in terms of inventory gains for businesses. There could be a cost squeeze, as well as sales slack for several businesses even as they try to pass on this commodity and cost spikes to customers. This trend could break the earnings momentum in several businesses if we do not see a swift correction in the commodity price spikes.

While a lot of equity strategists are positioning themselves on these expectations, events seem set to surprise them. Under the circumstances, economic growth is likely to be tested and it remains to be seen how our economy sustains the growth expectations made in the early weeks of 2024. Sustaining economic growth will somewhat moderate the shocks to our equity markets. Any slowdown will pull the rug off from existing equity valuations.

The occurrence of a normal monsoon, revival of water storage in India’s reservoirs, higher food production that will help keep inflation in check, and sustained investment are crucial for our economic growth to sustain. The new government will have some tense moments in its early weeks even as the economy settles down and gives better visibility on growth and inflation.
The coming month will see domestic politics, domestic liquidity and global sentiment dominate the equity markets. For now, the markets are seeing liquidity as the primary driver and politics seems to be taken for granted. Global sentiment is getting discounted very swiftly in our markets and we seem to be very comfortable using adverse global sentiment as a buying opportunity.

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