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During the week, the domestic market was very volatile. Started on a gap up, in continuation of the last week’s Diwali festival trend. However, a weak global market squeezed by elevated inflation spooked the trend. The week started on a disappointing note with growing inflation in China, CPI rose 1.5% YoY, while the producer price index rose by 13.5% YoY owing to imported inflation and domestic supply shortages.

The concerns over super inflation expanded, as much-awaited US inflation hit a 30-year high of 6.2% YoY. Adding fears that the FED may have to review its ongoing accommodative policy and switch into a faster than forecasted tapering and rise in interest rate starting from 2022. The domestic market followed the muted global trend, however, the momentum reversed on Friday regaining back all the ground lost during the week taking a breather from the sell-off.

This was supported by some relief in the US market after an accommodative statement from the Fed and good earnings which were not impacted by high inflation. Indian market reverted to stocks & sectors which are expected to be least impacted by inflation like IT & services-oriented, beneficiaries from this pent-up volume growth, reforms, good quarterly earnings, and strong domestic macro data forecast like GDP.

In the coming week, the domestic investors will focus back on inflation awaiting the release of inflation data. CPI inflation for October is forecasted to remain close to the previous month & level of 4.35% while WPI inflation is to show some increase from the September level of 10.66%. Also, the investor’s focus will be on the primary market, which is offering new-age companies, a great complementary & diversification to existing trading business models.

During the last month, there have been a set of factors hurting the super trend of 2020 & 2021, starting from high valuations to fall in liquidity like FII inflows. Today the key concern is stagflation, which has been consistently coming above the expectations popping worries that these prices are not transitory in nature as forecasted earlier by central banks. They can stay high for some more quarters, leading to an increase in interest yields and faster change in easy money policy. This can instigate central banks to hike interest rates, slowdown the rate of economic recovery & inflow in the equity market.

Need of the hour is to have a balanced portfolio with a mix of defensive stocks & sectors, debt, and cash in hand, after the super rally which may not replicate in the short to medium-term. The best defensive sectors will be like IT, Pharma and Telecom. At the same time, we should also note that this economy is expected to have a strong revival with growth, so we should also consider sectors like banks on a long-term basis which is expected to benefit from rise in credit & yield. Those stocks & sectors will not be impacted by high inflation like domestic-focused companies, online backed strong business models (stock-specific since sector overall is expensive), FMCG, domestic & global-based manufacturers.

(The author of this article is Head of Research at Geojit Finanacial Services. Views expressed are personal.)