Financial markets ride their way through headwinds and tailwinds. Headwinds resist the surge in share prices, while tailwinds provide momentum to them. Today’s prices in markets are a function of tomorrow’s profits. You invest with the hope of eventually making money. To achieve your objectives in the long term, you need to navigate through resistance. You need to worry about them if you have invested across asset classes.
The risk of inflation is the most significant headwind that financial markets worry about. It is the most significant risk to future growth. For stock markets to perform consistently, steady economic growth is paramount. Businesses can then ride on that steady growth to generate profits.
For that purpose, you need to look at the assessment of the Reserve Bank of India. They publish a monthly review of the economy in the monthly Bulletin. While the headline data worldwide shows a steady decline in consumer price inflation, the world economy is not out of the woods. Retail prices are down globally, but wholesale prices continue to see upward pressure.
The monsoon is catching up in July 2023 after a slow start in India. “Manufacturing and services activity remains in expansion albeit with some sequential moderation in June in composite terms from a near 13-year high in April and May,” said the RBI analysis.
The other significant development is the commentary from IT services companies. India exports nearly $200 billion of software services through large companies like TCS, Infosys and others. Their stock market performance has decreased benchmark indices after the June 2023 quarter results. The Nifty IT sector index has underperformed the NSE Nifty 50 over the past week.
You must read the commentary put out by the company management after they announce their quarterly results. In a conference call with analysts, K Krithivasan, TCS CEO and MD, said that clients were seen reprioritising projects in favour of those considered business-critical. In simple English, that means the business momentum is slow. Software services companies get large outsourcing contracts from American and European companies. At the moment, they are giving out essential work.
Infosys Technologies announces an annual revenue guidance. The company cut the estimate of the annual revenue growth for 2023-24. That spooked the stock market, and share prices tumbled. That is despite the company beating all other profit and revenue estimates for the quarter. All of that is no good news.
The vital reading one can do is that businesses in America are still not confident enough to spend resources on IT services for growth. That means they are adopting a conservative approach towards spending and probably expect slower demand for goods and services going forward.
Hindustan Unilever, the biggest consumer company in India, is a barometer of consumption in India. About two-thirds of India’s gross domestic product, or GDP, is due to consumption. That is the money we spend on goods and services. In a presentation to investors after last week’s quarterly results, the company flagged inflation as a continued risk going forward. Due to high cumulative inflation, the demand for consumer goods continues to remain weak and is likely to pick up slowly, the company said. HUL has improved profit margins and increased advertising spending in the June 2023 quarter. That could have a positive impact in the subsequent quarters.
Avoid undue risk
Stock markets are rallying on the back of some strong tailwind in the form of foreign flows. The intensity of foreign flows is higher as international investors look to India with hope in light of a significant slowdown in China. However, Indian shares are already at a record high. While the financial performance of top-rung companies is meeting expectations, the outlook they put out is not so encouraging.
That should result in fierce resistance to share prices at current levels despite rising foreign and domestic flows. Understanding these headwinds matters as you look to increase your exposure to equity assets. A systematic investment plan in companies that show balance sheet strength could be a good way forward.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)