117881In view of reduced inflation and expenses, will it be right to invest in IT stocks?
Inflation has been a talking point in India since long. However, in the last 2 years, we have seen an inflation scare at the global level that started with a rise in global commodity prices and that had both positive as well as downside for Indian companies.
Investment in the share market or in any other asset class is considered good when it beats inflation and gives a higher return than that. It means that your idle savings are not getting eroded, simply put inflation is not eating away your savings.
The Russia-Ukraine war caused global supply chain disruption which led to an increase in commodity prices. Central banks including RBI increased rates to control inflation. Between May 2022 to February 2023, RBI increased the repo rate by 2.5%.
Although rates have been unchanged for the last 2 policy meetings. Still, as per the current situation, we can’t expect a rate cut for the next one year. India’s retail inflation in July increased to a 15-month high of 7.4%. In such a case, if inflation remains a cause of concern then how can you play that theme in the share market? Let’s understand.
Inflation has been a talking point in India since long. However, in the last 2 years, we have seen an inflation scare at the global level that started with a rise in global commodity prices and that had both positive as well as downside for Indian companies. As prices of commodities like metals, and crude oil shot up, oil and metal companies made fortunes and rewarded investors heftly.
On the darker side, it reduced the pricing power of people across the world and that impacted spending. In order to tame inflation, central banks across the world went on a rate hike spree to reduce the inflation. Central bankers want to control inflation but not at the cost of economic growth. Overall, inflation scare is not over yet as RBI has increased inflation forecast for FY24 from 5.1% to 5.4% in its latest MPC meeting.
In such a case, it seems that you can say that you should invest in companies in commodity sectors like metal, oil etc. Well, it may not be so striaght forward. You actually need to look at the business model of companies to decide how they will sail through inflation.
As per Siddhartha Khemka, Head Retail Research Motilal Oswal, an inflationary environment supports companies that supply raw materials and consumers are impacted negatively. If commodity prices increase then companies of sectors like oil, rice, sugar and metals may gain.
If commodity prices go up then you need to see how that will impact margins of companies. That will depend on majorly 2 things. This will depend on pricing power and supply chain management.
Khemka said that FMCG companies depicted pricing power by either decreasing grammage or increasing the product price after February 2022. Still, the margins of these companies witnessed a decline in the last 1 year.
Coming to supply chain management.You should focus on companies that are not dependent on just 1 or 2 suppliers. This will help the company in maintaining its margins. Basically, focus on companies that can maintain their margins during an inflationary environment. Also keep in mind that during inflation consumers become highly price sensitive, so you can avoid the companies that are in the business of highly discretionary products.