When the world’s largest economy struggles to fix her macros, there is bound to be intense anticipation. The world watches out for positive signals from it. We want to get a fair picture of how things are changing, even while looking out for early signs of improvement. We already have loads of predictions floating around and need to get the right fix on how things are playing out. But, when it suddenly becomes a challenge to predict timelines for improvement, you start wondering if things can actually deteriorate from here.
We see that mood slowly emerging amongst global investors on the American economy. Will inflation become too difficult to tame? Will they need to raise interest rates instead of cutting them as they promised? If so, how will the world change its investment stance.
Clearly, we are now moving to a place where we never imagined to be at the beginning of the year. The ripple effect of this change in mood and expectation is visible in major asset classes. Precious metals rallied swiftly. The US treasury yields bumped up immediately after the Fed commentary was out. Equity markets which were at their highs suddenly saw a mild wobble. Uncertainty is slowly gripping the investor psyche.
While most equity investors aren’t reacting immediately, they are beginning to see the inevitable need arising. A defensive stance in investing is now going to become more and more unavoidable. While this stance may be needed only until the war on inflation is decisively won, it is certainly not something that we can give the pass as it was hoped a few quarters ago. This phase will be marked by heightened uncertainty, fall in credibility of central bankers, a rising risk-aversion trade and lesser availability of capital for business.
When capital becomes scarce, this will force markets to price equity more efficiently. This shift will be exactly the opposite of the post Covid equity trade set up. The problem with this shift is that the market has almost forgotten how a capital scarce equity market will price the asset class itself. So, we could well be learning it all over again.
The problem when the going gets too good, is that we forget how the tough times get going. Adapting to tougher times is now the biggest challenge for the global investors. Indian investors cannot expect to be exempt from the spillover of global trends. We will also be shoved into the centre of the global tumult whenever it arises and will wake up to that someday. When it happens, we will certainly know. Until then, it is good to stay alert, prepared and in a state of readiness.
