Amid the concerns over rising oil and commodity prices, global stock benchmarks have been on a downward slide. Fears of higher inflation, which may consequently derail global growth, have also pushed some investors to sell off.
Food prices, which account for nearly half the inflation basket, are also expected to remain elevated as supply chain problems related to the Russia-Ukraine war disrupt global grain production, supply of edible oils, and fertilizer exports.
Prices of palm oil, the world’s most widely used vegetable oil, surged nearly 50 percent this year.
The US Fed is in dilemma now – Is inflation a bigger concern or growth?
Since Fed’s hawkish turn, global financial conditions have been tightening. The recent spike in crude oil is stagflation ARY – pushing inflation higher and demand lower by eroding the purchasing power of the consumers.
The question then is – will Fed worry more about upside risks to inflation or downside risks to growth?
We think, there is a rising likelihood that Fed slows its tightening. Odds of a 50bp hike in Mar-22 and six more in 2022 have receded to some extent. Still, rising oil prices and some Fed tightening pose downside risks to global recovery. With the ongoing war, there is a likelihood of the Fed going slow on tightening, which will be a relief.
However, Fed Chairman Jerome Powell said last week he still sees interest rate hikes ahead though he noted that the Russia-Ukraine war has injected uncertainty into the outlook.
Also Read: Why Higher Inflation Could Be India’s Next Big Worry?
Powell said the likely path for rate hikes will be increments of a quarter percentage point, though he said he would be open to more aggressive moves if inflation gets worse.
For India, growth could be hampered through exports slowing down, the trade deficit could widen due to oil spike while capital flows could be volatile due to geopolitical uncertainty and Fed tightening.
For India, not only are the risks to recovery rising, but a USD10 a barrel rise in oil widens the CAD by 0.4-0.5% of GDP. If crude stays at USD100 a barrel, India’s CAD could widen by ~1% of GDP, and domestically, fuel pump prices could rise by Rs 10-15/liter.
The saving grace is that corporates and banks’ balance sheets are in far better shape today
Though the valuations are starting to look reasonable on a comparative basis. At the Nifty peak of 18,600- the FY23 estimated PE was 21 times which is now 18 times.
Though, the earnings estimates are expected to come under pressure due to margin pressure. So for the time being, one should ideally remain on cash.
A financial planning platform where you can plan all your goals, cash flows, expenses management, etc., which provides you advisory on the go. Unbiased and with uttermost data security, create your Financial Planning without any cost on: http://bit.ly/Robo-Fintoo
Disclaimer: The views shared in blogs are based on personal opinions and do not endorse the company’s views. Investment is a subject matter of solicitation and one should consult a Financial Adviser before making any investment using the app. Making an investment using the app is the sole decision of the investor and the company or any of its communication cannot be held responsible for it.