The RBI has corrected its estimate of India’s GDP for the current financial year downward. The inflation forecast has been revised upward. Clearly, we are heading towards a phase of slower economic growth and higher inflation. This sets up the stage for rising interest rates.
What does this mean for your investing? Investing in an era of rising inflation and interest rates when growth is slowing must be very different. Investors need to align their investing with the changing scenario. First, we need to reduce our expectations of corporate growth and earnings. Second, we need to tone done our valuation metrics. This would mean a break from how we viewed growth and valuations.
In recent years, the markets gained significantly from rising liquidity, low inflation and a return to growth during COVID. Now, we are going to see liquidity contracting, inflation rising and growth slowing. Valuations will need to be moderating from the current highs and this should see a long sideways phase for our markets. Excesses in valuations will get sold into by smarter investors. So, caution is necessary for buying stocks with falling price trends. This is a time to be careful in blindly buying dips.
But, it is also a good time for businesses benefiting from inflation. Equity investing is set for a significant reset. This reset will also follow in other asset classes like debt. The changing scenario is now making it critical to explore options, reset asset allocation, and keep equity investing aligned to conservative valuations. Value investing is definitely making a comeback now.