How to invest amidst growth versus inflation conflict

It is getting dizzy out there. Last week, The Economist, a weekly publication from London, warned that the inflation problem in America is not fixed yet. That is despite a sharp surge in share prices and growth. Morgan Stanley, a global bank, sent a note suggesting that equity investors are shrugging off risks about a potentially more robust interest rate policy response from the US Federal Reserve and higher interest rates. The bank argues that that could affect further economic growth and asset prices.

Equity investors expect neither a ‘hard’ nor a ‘soft’ landing for the US economy. The so-called hard landing will only be delayed in such a situation. Firm productivity-led economic growth is always desirable. However, if that growth stokes inflation, a recession could follow that.

Cut to India. The minutes of the monetary policy committee meeting, held earlier in the month, show the conflicts of thought among the committee members. The committee stance suggests inflation remains a concern and more policy rate hikes are in the offing. However, diving deeper into the commentary, one can hear murmurs about too much front-loading of policy action. Those on the committee want India’s growth momentum to remain intact.

“Raising real policy rates to reduce demand has a stronger effect on growth than inflation,” said Dr Ashima Goyal in the RBI MPC meeting. Dr Goyal voted for a pause in repo rate hikes and against the committee resolution to raise rates. Professional Jayanth R Varma also voted against the repo rate hike. The divide in the committee shows that the battle is set to intensify between savers and investors.

While savers want high repo rates, investors want low rates to stimulate growth.

As an investor, you need to play your cards right.

In 2023, Indian equities have had a mixed performance. While the NSE Nifty index has increased, the Nifty Auto index has jumped 18%, while the Nifty IT sector index is down 20%. The Nifty Bank index is up 13%.

The performance of the critical sectors does not show a simple, straightforward trend. They do tell stories, though. If interest rates are rising, it is unusual for automobile company shares to rally. A lot of car sales are based on vehicle finance. If borrowing costs go up, auto sales tend to remain weak. The surge in automobile share is due to the budget announcements related to capital expenditure on infrastructure. The government also announced a specific vehicle scrappage policy. That could trigger a churn.

The slump in IT shares indicates a possible slowdown in global IT spending. Most Indian IT companies export software services to businesses in the US and Europe. Any cutbacks in discretionary IT spending could hurt the performance of Indian companies.

The rally in bank shares is due to the surge in demand for financial services like mutual funds, insurance, trading and loans. Despite a visible slowdown in the non-food credit growth, the underlying demand for loans drives banks’ interest income.

You can take professional help to determine the right sectors or use Alphaniti to find your way out of the inflation-growth conflict.

How to invest amidst growth versus inflation conflict