Machibet CasinoHow to save your investments from high inflation

There’s a joke that inflation is paying Rs 200 for a Rs 100 haircut you used to get for Rs 50 when you had hair. But with wholesale inflation shooting up to 14.55% and consumer inflation rising to 6.95%, the rise in prices is nothing to laugh about. medium nocaption91464082High inflation not only puts pressure on your wallet, but also has a deleterious impact on your investments. Right now, the spurt in commodity prices has pushed up the input costs of companies, which in turn has crimped margins and depressed earnings. Moderate inflation is good for the equity markets because rising prices mean higher revenues for companies and bigger profits. But when inflation is abnormally high (as it is right now), equity markets don’t do too well. In the four years from January 2010 to December 2013, when inflation was very high and briefly crossed 12%, the Nifty rose at a tardy pace of just 5% per year.Incidentally, the impact of high inflation does not show up on stock prices immediately. “Initially, businesses benefit due to inventory gains and their ability to pass on more than the necessary price hikes. The real impact of inflation comes with a lag of 2-3 months,” says Deepak Jasani, head of research, HDFC Securities. medium nocaption91464521What investors should do The prevailing high inflation is expected to continue for some quarters before the high base effect kicks in and moderates the growth rate. Experts say investors need to accordingly reposition their investment portfolios. “No sector is inflation-proof, but high inflation will hit manufacturing companies more than it will affect services companies,” says V K Vijayakumar, chief investment strategist at Geojit Financial Services. medium nocaption91444506Stocks in which high expectations have been built up will be particularly hit. “High inflation and interest rates means the future cash flows will get discounted at a higher rate, leading to lower current valuation of companies,” says Jasani. Some sectors such as FMCG, power and pharma are traditionally seen as defensive sectors that are likely to thrive even when prices are rising very fast. But many FMCG companies have been hit by a steep rise in input costs. Only companies that can pass on this rise in input costs to customers will be able to deliver. medium nocaption91444255“Earnings growth is possible only if companies have pricing power. So you need to be extremely selective in picking stocks even within these sectors,” says Vidya Bala, co-founder of Primeinvestor.in. Power companies can pass on the higher cost of generation to consumers, but many other traditional defensive sectors are no longer safe havens. For example, biscuit manufacturers have seen prices of raw materials soar in the past year. But they have very little pricing power due to the stiff competition in the category. If they increase prices too much, consumers might shift to other brands. However, in some categories such as beauty products, companies are able to retain the pricing power. Also, high crude prices have increased the input costs of paint companies. “But a dominant player like Asian Paints will be able to pass on the price hike to consumers without affecting sales,” says Vijayakumar of Geojit Financial Services. medium nocaption91464535Before you jump in, take note that many stocks in the consumer staples space are trading at very high valuations. When the sector PE (price to earnings) is close to 65, there is no margin of safety left. “FMCG sales have started moderating. These stocks will face a time correction,” cautions Aditya Kondawar, COO of JST Investments. A lot of people have pinned their hopes on the banking sector. Their optimism stems from the healthy credit growth reported by banks in recent quarters. But not everyone is impressed by the uptick in credit demand because it is not clear where this demand is coming from. “Working capital demand may be up due to inflation boosting the values of debtors and inventories. There is no indication whether the credit uptick is due to capex demand. We must keep a lid on our excitement till we know where the higher demand comes from,” says Jasani.One disturbing aspect for the markets is the relentless selling by foreign institutional investors (FIIs). FIIs have offloaded stocks worth almost Rs 2.65 lakh crore since October 2021, and continue to be net sellers in equities. This has not led to a large-scale sell off till now because domestic institutional investors (DIIS) picked up stocks worth Rs 1.93 lakh crore during the same period. medium nocaption91464383However, this trend of FIIs selling and DIIs buying cannot continue forever. “If FIIs continue to sell, the local buffer may become weaker,” warns Jasani. New investors who entered the markets in the past 3-4 years haven’t seen longer bear phases. They have been sanguine because in recent years markets have tended to quickly bounce back after any correction. medium nocaption91464561Can global exposure help? Many investors may be considering global diversification at this stage. But experts don’t think it would be of much help. Many other countries are also reeling under high inflation and staring at the prospect of weak economic growth. “Global diversification has benefited Indian investors in the past 5-6 years. But when markets across the world are going to be weak, diversification will have a limited impact,” says Vijayakumar. The US market has seen almost unidirectional movement from April 2020 to early 2022, helped mainly by the fiscal stimulus that led to an inflow of almost $1 trillion into US stocks. But this unidirectional market is now over and the US Fed has turned increasingly hawkish. Analysts expect the US Fed to hike rates by 200 bps in the coming months, which could turn the tide for US stocks. If rates are hiked, many US businesses will see their cost of capital shoot up and profits get dampened. If the US economy stutters, the world economy will get impacted. It is yet to be seen whether the US Fed can ensure a soft landing for the economy – which is to hike rates without causing a sharp economic slowdown. Increasing global exposure in such a situation may not help. “We have always maintained that global exposure is at best a diversifier for an Indian investor. They should have 10-15% of their equity portfolio in global stocks, hence there is no need to increase exposure at this stage,” says Bala. medium nocaption91464587If investors have access to international stocks, then primary producers and commodity firms will provide some hedge, but this should be within the overall 10-15% allocation to global equities, she adds. Interest rate hikes coming Back home, rising inflation is also the trigger for interest rate hikes, which in turn impact bond yields and prices in the secondary debt market. The RBI has not hiked rates till now, but analysts believe a rate hike is imminent. “We expect at least three rate hikes of 25 bps each in this financial year. If crude prices remain high due to the Ukraine conflict, there might even be four rate hikes,” says Vijayakumar. The rise in interest costs will be bad news for stocks. As it is, the interest coverage ratio of BSE 200 companies has declined in the previous quarter. The interest coverage ratio denotes the ability of a company to service its debt. medium nocaption91444376Private consumption, already on the decline for the past two years, will also be hit if interest rates are hiked. “A lot of sectors will be hit by the increase in interest rates, particularly real estate and auto where credit/EMI purchases play a key role,” says Jasani. medium nocaption91464827If rates are hiked, bond yields will shoot up, which will hit long-term bond prices. This is why most wealth managers are advising clients to stay in short duration bonds that are not very sensitive to interest rate changes. “Stick to low duration bond funds and short-term fixed deposits. These will not be hit if interest rates are hiked,” advises Sumita Pillai, CEO of Torus Private Wealth. medium nocaption91444357At the same time, the rise in the 10-year benchmark bond yield (it has risen beyond 7.15%) means this could be a good time to start buying long-term bonds. Investors who plan to buy and hold or want to build an income strategy can look at 5-10 year bonds at this stage. “It is never easy to time the entry at the highest yield point. But averaging through the mid-rate to the peak can generate gains when the interest rate declines. Even if it does not, a buy and hold would still help tide over mark to market losses,” says Bala.Stagger your investments Most importantly, don’t rush to invest in the markets. The coming months are likely to witness extreme volatility in the markets, which would tempt some investors to jump in. “Enter the market gradually by spreading the investments over the next 3-6 months,” says Harshad Chetanwala, CoFounder of financial planning and wealth advisory firm MyWealthGrowth.com. medium nocaption914646721. This inflation is different and it's going to hurt 2. Medicine for son or vegetable for family? Life in the times of record inflation3. Why increase in your borrowing cost is imminent and imperative medium nocaption91464611