What do you think is happening in the markets, especially in industrial metals across the globe? What is the world trying to price in? Will global growth or recovery be slower than what was anticipated earlier?
There is a bit of slowdown which is definitely being priced in but I do not think it is purely because people believe that the GDP growth is not going to be good enough. It is also a function of the big rallies that we have seen. Of course, there is a drag from the Delta variant still spreading and that is leading to reopenings not being fast enough.
Of course, the big factor always is the reserves and the market is still digesting what this tapering is going to be like. But I just do not think that the Fed will be able to remove a lot of support, let alone raise rates — which is still in the future. Therefore, the market will very soon realise that we are stuck in this low rate environment which is very stimulative for everyone. As far as commodities are concerned, it will be driven by the rate of GDP growth. There is more delay in reopening or full reopening and that will be a drag.
But I am in the camp that says inflation is transitory because if one looks at the consumption numbers or the consumer strength in the US, it has been largely been supported by the cheques being given by the federal government and that will disappear and we will back to a situation where consumers are not as strong as people are making it out to be. A small section of people have done well and they always do well and that stays. The story does not change much and so we will still have reopening growth and that may get delayed but it is definitely on the cards still.
Worldwide markets are pricing in great recovery. So, would the carnage be equally faster?
On S&P, we have had more than 40 all-time highs which is understandable given that we are trading at an all time high. We have seen the same in Europe; the Europe STOXX 600 index is also at an all time high. The China news, in terms of what they are doing with tech companies, is a drag. The port closures in China are a drag. One has to understand that the market works in a very short sighted way, at least the asset prices in the equity market. On two or three news of some lockdown somewhere or port closures, people start selling down and that is not what investing is about. Investing is more about looking at medium term cycles and on that, I just do not see how we are not going to have growth or how asset prices are not going to grow or why investors are not going to be in equities because there is no other alternative.
Even if one sees an interest rate increase next year, it will plateau out very soon, given how much debt the central governments have in most of the countries. There is no way the interest rates are going to go much higher. It will continue to support asset prices. The consequence of that will be social, in terms of income equality and what follows from that. But that again is in the future. As far as asset prices are concerned, it will be supported. We will also have growth because tech growth is going to continue. Technology is disinflationary and that does not change. No matter what happens, that is just going to accelerate.
But is it time to be with defensives right now? Would you advise investors to move to defensives like gold and some other assets which do not move so much?
The seasonality in the data is very clear. At least in the big developed markets, July and particularly August are always slow months and maybe to some extent even September because people are on summer holidays.The market has always had a very good turnaround from the end of September, October. Seriously, if somebody is trading in the short term and using leverage, then they can be on the defensive. But if your investment style is for six to 12 months minimum, then there is no need to be too defensive. Rather, one should be looking at picking up stocks which are getting sold off if those are good. You should always know what you are holding and what your company does, what the management does, what the quality of the management is and quality of growth is more important. Volatility in my opinion is not a risk; it is just an opportunity to buy the stocks that you like if you do not have enough or if it has fallen far enough.
