Tips for Wealth Management for Fiscal Year 22
Globally, immunization campaigns are the main focal points. 2020 was a year of the “ V ”: first the virus, then the V-shaped recovery, and now the vaccinations. The final victory over the pandemic should prevail, but the question is when and not if. The wide availability of effective vaccines is expected to lead to savings allowing social activity and high-contact services to resume seamlessly, gradually approaching pre-pandemic levels.
However, crisis-mode measures are expected to continue: central banks are expected to maintain easy monetary policy and government fiscal policy is also expected to continue, although to a perhaps lesser extent than last year; this will lead to lower long-term policy rates and higher inflation leading to negative real interest rates. As economies recover from the crisis, GDP growth is expected to recover from lost output next year, although it will take a few more years to regain potential growth.
In addition, unemployment is likely to remain high, as job losses from the pandemic, likewise, may not be fully recovered.
Biden-led political leadership in the United States could focus more on multilateral trade and a more predictable foreign policy, less tied to Twitter, which can likely lead to inclusive growth.
Nevertheless, any delay in mass vaccinations; a further escalation of US-China tensions or any new geopolitical event could present risks.
Global reflation-led commodities rally
Global commodities should greatly benefit from reflation trade. Outlook for risk assets incl. commodities have improved mainly because of the “something better than nothing” attitude towards vaccines. The liquidity glut and the gradual recovery in business activity could further stimulate demand for industrial metals and agricultural products.
Oil prices are expected to be driven by how OPEC + responds to growing demand and by the fact that U.S. shale producers remain low on investment as the pandemic emerges. The pro-green and pro-Iran stance of the American Democrats is likely to limit these upward movements. This could lead to input price inflation benefiting / affecting resource exporting / importing economies.
Gold still plays a role in portfolios
Gold was one of the best performing assets in 2020; with investors in a sustained mood and an expected pickup in economic growth, gold is unlikely to repeat last year’s gains in 2021. While unusual volatility and uncertainty have left the equation, the gold remains a privileged hedge against inflation. In addition, the expected weakness of the USD in the medium-term money supply and monetary ease around the world bodes well due to its inverse correlation with commodities and the low opportunity cost of holding it. unproductive assets like gold respectively.
India – A positive point after the pandemic
Back home, the government. has focused on structural reforms in recent years – GST, IBC, RERA, Corp., tax cuts, infrastructure promotion, land, labor and agriculture laws, staged manufacturing and now Atmanirbhar Bharat (PLI) – building blocks of long-term growth. This has improved the ease of doing business and attracted foreign capital – through both FDI and FDI.
The aim is to make India self-sufficient and benefit from MNC’s China + 1 strategy – therefore, several sectors are expected to benefit such as: electronics and white goods manufacturers, capital goods players and defense equipment, intermediate producers Pharma KSM / API, automotive and automotive. auxiliary products, agriculture and chemical specialties, food processing and textile products.
The next stage of reforms could focus on governance, social development, sustainability as well as unlocking the land supply, sectoral FDI policies, privatization of the energy sector and reforms of the financial system. (capital markets, public finances). As always, a steady increase in demand must be seen to bring back the growth of private CapEx and bank lending in 2021.
The current correction offers a medium-term opportunity
Indian stocks have been healthy, with most companies outperforming analysts’ estimates across all sectors, having positive management comments and announcing structural reforms that could boost a strong earnings outlook. A healthy rural economy, revival of demand following a pandemic, government infra spending plans and PLI programs could increase profit growth for a reasonable period, could keep destinations attractive for foreign entry.
The larger markets are expected to benefit from a healthy economic recovery as well as an improvement in their scale. The bottom-up stock selection approach will work better than the top-down sector approach from now on.
Even though absolute (P / E, P / B, Market Cap./GDP) and relative (EY / BY) valuations suggest stocks are expensive, while improving visibility into macroeconomic and growth dynamics favors a positive view of actions.
Additionally, historical squeezed profits are the main culprit for the sky-high leak PE multiples.
Inflation and massive borrowing to limit gains
In the Indian fixed income arena, the RBI has played an important proactive role in securing financial stability amid the pandemic – policy measures on liquidity, loan moratoriums and ad hoc restructuring have helped to address shortcomings. risk of default. Borrowing in the market has been set at 12 trillion rupees for FY22, pushing the budget deficit to 9.5% of GDP in FY21 and 6.8% in FY21. ‘exercise 22.
The former FRBM has mandated a 3% budget deficit by FY21, so this is a welcome move by the FM in an effort to resuscitate the economy hit by COVID-19. Monthly GST collections have reached new highs in an attempt to create a recovery that could come as a positive surprise to the forecast fiscal deficit for fiscal year 22. RBI’s MPC is walking a tightrope – although it has reiterated its growth target and maintained an accommodative stance, growth may already recede and persistent inflation could wreak havoc.
Worries about growth, inflation, the budget deficit and the RBI auction devolution could continue to tighten bond yields despite RBI backing. Prefer high quality corporate issues / funds and short term investments in debt portfolios and avoid G-Secs and long durations.
The US dollar is expected to weaken
The sentiment of investors in the medium to long term could opt for a risky environment in the financial markets. Global capital flows could sweat from safe haven assets like USD, sovereign debt, gold and move to stocks, non-USD currencies and commodities which could put pressure on the index of the dollar. The widening of the US double deficit (current account + budget) could also weigh heavily on the dollar.
The INR could benefit from support from foreign capital inflows thanks to the rebalancing of stock market indices and possible inclusions of debt indices. High foreign exchange reserves provide comfort for import hedging, although the rising inflation differential between the US and India could tip the balance in favor of the US dollar. In addition, interventions in the RBI market are also at stake and therefore expect INR to be limited in the range.
The author, Rajesh Cheruvu, is Director of Investments at Validus Wealth. The opinions expressed are personal.