Be patient and buy slowly; stick to quality stocks: Arvind Sanger

“We are going to have a persistent overhang for some time till the inflationary data starts to moderate significantly because otherwise, the Fed and other central banks will continue to raise rates aggressively. This is not about accelerating growth and central bankers trying to keep interest rates abreast of current growth. They are trying to aggressively slow growth and that is why any rallies are going to be relatively modest,” says Arvind Sanger, Managing Partner, Geosphere Capital.

What is the advice for portfolio investors when we are looking at the impact being felt as on economy and earnings, risk being repriced? What should be the outlook?
It is very important to have high grade portfolios. We do not know how long this inflationary surge is going to last. We do not know much economic slowdown will be involved in solving this inflation problem. We do not know how long the Ukraine war will last.There has been an adverse impact on food and commodities. We do not know how long the Chinese zero Covid effect will last on global growth.

There are many global headwinds. Indian inflation is surging and this is a time to go for high grade portfolios and one should not be in the more speculative names which might give more upside if all clear sounds. But till the all clear sounds, it is time to be more conservative about sticking to high quality banks, high quality domestic plays, high quality pharmaceutical or IT companies.

Can it be an attractive opportunity to enter and fix the regrets just going by the emotional extremes?
The US market is much more oversold than the Indian market. The Indian market still has valuations which are not below historical means. What Hugh was talking about earlier applies very much to the US market. I am not sure if it applies yet to the Indian market in terms of seeing the extremes of valuations but to extent that the Indian market is being driven by global factors, if we get a bounce in US, Europe, China or many of these markets which are showing signs of selling exhaustion or getting close to it.

One could get a global rally which would carry the Indian market along with it. But I am a little nervous that the inflationary pressure is going to mean persistent headwinds. There is an old saying, do not fight the Fed. Right now we are fighting the Fed in terms of the Fed wanting to slow the economy down and notwithstanding that, there is extreme pessimism and bounce coming from that.

The reality is we are going to have a persistent overhang for some time till the inflationary data starts to moderate significantly, where one can have Fed and other central banks continuing to raise rates aggressively.

This is not about accelerating growth and central bankers just trying to keep interest rates abreast of current growth. They are trying to aggressively slow growth and that is why any rallies are going to be relatively modest till we get the all clear signal from the inflation data. Till then, you do buy oversold but you cannot get too bullish. One has to be patient and buy slowly and then come back again to the point of being in quality because this growth slowdown means that the markets will have a growth headwind in addition to an inflation headwind.