Bear Hugs and Bull Retreats

“We must fight terrorism as if there’s no peace process and work to achieve peace as if there’s no terror. ~ Yitzhak Rabin.

The operation Al-Aqsa flood by Hamas on Israel has escalated into a large scale war with possible spilling over into the neighbourhood. The delicate stability in the middle-east is once again threatened with the US throwing itself in. This opens a two-front war for the US with its fingers already in the Ukrainian conflict is now stretched itself in the Mediterranean. The biggest tragedy is the loss of civilian lives on both the sides.

The unprecedented attacks on Israel only hardens the resolve to respond asymmetrically. For now, the conflict seems like a long drawn affair and easy to spiral into a regional war. The geo-political risks suddenly rose with this conflict as the priority shifts from the Eastern front which is now twenty months old. The American involvement and the immediate transfer of resources has shortchanged the Ukrainians whose counter offensive has been not as expected.

The Fed pause and the subsequent commentary indicated a stop in the interest rate hike cycle though higher for longer is very apparent. The cooling down of red-hot employment streak is evident with unemployment climbing to two-year high as the first sign of impending things into the near future. The inflation numbers are hindered by the oil prices which continued to hover higher. The heightened geo-political tensions, crude production tightening, fed peak rates and the US’s debt & deficit could begin to have a bearing on the USD domination. This also perks up the perfect recipe for the yellow metal to gain ground in the coming months.

The Indian macro indicators continue exhibit strong performance with mild to moderate pace, amid slowing global growth. Inflation has been relatively stable though the hardening crude prices is a source of concern. China continues to witness growth pangs and they’ve registered their first ever net negative FDI as tensions rise over the semiconductor technology and concerns about increasing anti-spying activity heightened the risks.

What’s in it for you:

Equity: The FII flows continue to remain outbound even as valuations are not so cheap. The correction in the month due to the geo-political issues seem to have cut the froth a bit but the sustained domestic inflows keep the valuations rich. The robust macros can help handle the short term volatility inbound due to the global factors and hence provide a decent leeway to expose to equity. However, the opportunities in the market are now selective than ever and with the pre-final elections this month.

We continue to remain contra through the defensive by our exposures to Pharma, IT while expectations have to be trimmed going forward. Asset allocation is key to success in this environment and a staggered approach to equity with a bias towards large caps in the medium term.

Debt: The RBI policy has been stable and consistent with the domestic conditions while also keeping an eye on the global front. Most of the grunt work done in the last year-and-half is fructified if not for the spiking international crisis. Now, the trajectory of USD along with the crude prices become critical for any pivot going forward.

We continue to believe in the floating rate and ultra short duration funds in the immediate- to short-term. While a mix of duration and accrual would be for those with the stronger heart, accrual strategies tend to gain for the medium term.

Crypto: Stories of crypto spring started doing rounds as many of the tokens began a run up in their prices. The expectations of fresh demand from the exchange traded funds has fuelled the price of Bitcoin. The Bitcoin halving event in April next year came up on discussion boards to spice up the price but the overall fundamentals are weak, though the technically it hit the thresholds to bounce up. Though, a tiny slice of hamas funding, cryptos highlighted the concerns of crypto transactions in the wrong hands.

Disclaimer: The material is an opinion and not a recommendation for investment.