Monthly Market Commentary – Feb ’22

Monthly Market Commentary – Feb ’22

“If bubbles contain a misconception, as they always do, then it can’t be maintained forever.” ~ George Soros

Last month was a wakeup call for all asset classes on what inflation and its reaction (interest rate hikes) would mean. Equities to cryptos to bonds all had a volatile period especially during the second half of the month. This is what we’d warned earlier that the era of cheap money is at last over. As the chorus for US Fed rate hike became shriller, the pricing of the assets was having a churn. The most notable part was from the bond market which signalled the sign of things to come, by spiking yields.

As the-everything-bubble seems to be in jeopardy, investors are rushing to adjust their sails for the incoming storm. The expectations of rate hike measure from three to even seven in this calendar year. The world is now in a delicate position where it’s yet to recover from the latest variant shock, though the central bank led liquidity overload along with the supply chain bottlenecks has spiralled the inflation print. For over a decade, the western world tweaked their policies to imbibe inflation but when it finally arrived, we’re completely lost for solutions to tame it. If the Fed increases the rates too quick, it possibly could hamper the nascent green shoots and if the rate hike is too less then it’s ineffective to fight the inflation. It’s thin ice to walk.

The govt’s budget has no splashes or disappointments. The mundane yet practical outlay of the budgetary allocations are conservative, though. The perplexing part is however, on the budgeted borrowings for the next fiscal as well as the revised figures for the current financial year. The bumper surprise revenue this year hasn’t been completely adjusted against the projected deficit retaining a higher budgeted one. We’ll have a surprise (positive) in three month’s time when the actuals are out.

The concern is the continuity of the deficit expansion even as the external and internal scenario is changing, particularly from the interest rate point of view. The good part of the budget is the policy continuation of the past few years and building momentum in many of the big bang announcements that were done earlier. The possible inclusion in to the global debt indices could absorb the higher borrowing targets and also provide some anchor to the curve. The budget clearly outlines the Capex orientation despite the big state elections in the calendar. The importance of growth over fiscal consolidation could augur well for the country in the medium to long-term.

Add to these structural worries, there are enough flashpoints in the geo-political arena to give jitters. The Ukraine-Russia conflict and the brazen insurgency escalation in the middle east have a bearing on the commodity prices especially on the energy – Oil & Gas. The oil price could inch further up as the demand picks, supply remain status quo and with falling inventory. These headwinds could bring shine to the yellow metal.

What’s in it for you:

Equity: As forewarned, the volatility in the near-term would test our patience and conviction towards equities. The changes happening are so dynamic and fast-paced, the opportunities it provides are not straight forward at times. Though the possibility of stronger USD, it mayn’t translate immediate benefit with export oriented (traditional) defensives like IT and Pharma at peak valuations. Indian IT mayn’t be completely insulated from the global tech meltdown and the inward looking legislations may impact pharma too.

The time is to remain invested in value strategies and with staggered exposure to manufacturing and infra. The budgetary direction towards these sectors would benefit once the immediate-term dust settles. While it’s tempting to stick to sidewalk, the possibilities remain only being on the road.

Debt: Even at a lower disinvestment realisation, the govt is sitting pretty with surprise boost from revenues. The enhanced revenues could easily bring down the deficit but the thinkers seems to be worried protecting against any medical exigencies into the coming fiscal. That could only explain the conservative approach to number crunching despite a bullish call from the economic survey. Even the current year’s buffer could be to insulate against any impact of the Omicron variant.

The puzzling aspect of the govt borrowing plan has rattled the bond markets on the budget day and we would see the spike in the yields in the coming weeks as the world’s central banks (Ind included) tighten the monetary policies. The short end of the curve always offers solace at these times but a staggered investment into the medium to higher end of the curve offers big bang for the buck but certainly not for the weak hearted. The investment horizon could be upwards of 3 years to realise maximum.

Crypto: The budget clarified the most awaited issue on the taxation of cryptos. Virtual Digital Assets include Cryptocurrencies, Non-Fungible Tokens (NFT) but exclude Central Bank Digital Currency (CBDC) are taxed at a special rate of 30% with 1% TDS on the transaction. The losses arising from any transactions are not allowed to be set-off against profits of any income. Though implementation of this could further bring complexity, it has effectively increased the barrier by miles. There’s a growing concern about criminal activity in the digital assets space as regulators ponder about 18% yields on crypto savings accounts might be too tempting. A DeFi project called Wonderland is being rocked by controversy following the disclosure that it was being run in part by a felon with ties to one of the biggest cryptocurrency scandals. The month also witnessed a $1tn wipeout of the total capitalisation.

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