Rising crude oil prices, record weakness in the rupee, soaring gold prices and growing uncertainty around the West Asia crisis have triggered sharp volatility across Indian markets in recent sessions.
In an interaction with IndiaToday.in, Akshay Chinchalkar, Managing Partner and Head of Markets Strategy at The Wealth Company, the wealth and asset management arm of the Pantomath Group, spoke about the broader macro risks facing India, why markets are suddenly nervous about inflation and growth together, the sharp selloff in IT stocks, the outlook for gold and what retail investors should avoid doing during periods of volatility.
Below are edited excerpts from the interview:
Q. What do you make of the current market setup where crude oil prices, gold prices and the dollar are all rising together while equities remain under pressure? Is this beginning to look like a broader macro stress cycle for India?
Crude prices continue to hold up because talks of a lasting deal between the US and Iran have hit a wall. At the same time, the physical market is not as tight as it was maybe a month ago, because buyers don’t want to risk buying at high prices and then see prices plunge if some sort of a deal is agreed upon — this is specifically the reason why gold prices are gaining.
Then, you have the dollar index which has been unable to make any upside headway despite the crisis. The story for the rupee though is different — it continues to plumb new lows every day on fears of three things happening at the same time: slowing growth, tighter monetary and financial conditions, and worsening external balances.
Is it a full-blown crisis? Not yet at least, but with the PM’s appeal on the weekend, it is obvious that the damage is now evident.
Q. The rupee has slipped to record lows against the US dollar. How worried should retail investors be about the rupee weakness at this stage, and what parts of the market usually feel the pressure first?
Retail investors must be concerned because a falling rupee makes imports even more expensive. This is the classic problem of high imported inflation.
A falling rupee in itself is not a problem, but when the drop is accompanied by rising yields and rising oil prices, it can become a self-serving loop.
Coming to the markets, the first-order effects of rising oil prices will be seen in the prices of oil marketing companies, airlines, paint and chemical companies since crude oil is a key raw material in these businesses. As the cost of the input rises, margins tend to come under pressure.
Export-oriented businesses such as IT and Pharma can do relatively better in a falling currency environment, provided global demand for their products and services does not come off and assuming they have not hedged already.
Q. Markets seem to be reacting sharply even before any major fuel price hikes have happened in India. Do you think investors are more worried about inflation now, or about a possible slowdown in consumption and growth?
I think investors are worried about both growth and inflation.
Everyone is hoping for a deal between the US and Iran — and it will come eventually — but it is amply clear that disappointment is creeping in because expectations of a swift resolution were priced in by nearly everyone and that’s not happened.
We still think inflation is a bigger concern at this point. The second-order effects are yet to trickle in, so the uncertainty between now and when that happens going forward is likely keeping hopes alive.
Another reason is that the government has acknowledged the situation that the economy finds itself in, so investors are probably taking consolation in the fact that more measures may come if things go further south.
Q. IT stocks have emerged among the biggest losers during the current correction despite benefiting from a weak rupee historically. What do you think markets are signalling through this sharp IT selloff?
I think it’s obvious what they are signalling. Global tech trends are clearly pointing in an obvious direction, and that’s AI.
Look at how other regional markets such as Taiwan, Korea and Vietnam are doing — they are benefiting from global investors thinking of these regions as serious contenders in the AI boom being witnessed globally.
So, in relative terms, we need to ask ourselves where our IT firms are in this evolution and how we are preparing to join a race where flows into tech will increasingly matter going forward.
Q. Gold prices are at record highs as investors rush towards safer assets. What do you make of the current rally in gold? Is this still a sensible hedge for retail investors, or are emotions starting to drive the trade?
Gold prices have continued to rally because the dollar, against its global peers despite the current crisis, is unable to break higher.
Prices are reacting to three things — safe-haven demand, the increasing trend of diversifying from the dollar and the risk of higher future inflation.
As long as the dollar index remains under the 100-101 area, gold prices should remain well supported by retail flows.
Q. SIP inflows into mutual funds have remained surprisingly resilient despite volatility and geopolitical uncertainty. Do you think Indian retail investors have genuinely become more disciplined, or is the real test still ahead if markets remain weak for longer?
Compared to the pre-Covid era, retail investors in India have certainly become more informed and disciplined. Long-term investing via SIPs is being embraced like never before.
This can be seen in the fact that as of March, Indian investors had plowed money into domestic mutual funds for 61 straight months.
However, we need to understand that most dips since the Covid lows have been rather shallow, leading to swift recoveries. The real test will come if this large sideways trend continues for longer.
Q. If the West Asia crisis worsens and crude oil prices stay elevated for several months, what are the biggest mistakes retail investors should avoid in this kind of environment?
The biggest mistake that investors can make in this scenario is reacting emotionally, either by panic-selling equities or stopping their SIPs.
When you are a long-term investor with a clear focus on building wealth, you should not get bogged down by short-term volatility, which is a feature, and not a bug, of market cycles.
Staying disciplined through volatility is what differentiates a good investment from a great investment.
Q. Before we wrap up, is there one signal or trend in markets right now that you believe investors are not paying enough attention to?
I think that for the Nifty, the March lows near 22,200 have a high probability of holding, unless the crisis escalates from here. There are no signs of that for now, even though Hormuz remains effectively shut.
Interestingly, the Nifty Midcap index could spring a larger surprise on the upside.
We say this because the midcap index this past week had rallied around 18% from its March lows and had also made a record high. We tested similar occurrences since the start of the century and the data showed that such a signal had produced positive returns on average 12 months forward, with the market higher 84% of the time.
So, besides keeping a close eye on these markets, watch the dollar index. If it breaks down below 95, gold, silver and emerging markets may get a real tailwind to further their advance to more record highs.