Are you looking for emerging opportunities in a volatile market? Keep these 5 sectors on the radar

Having seen a steady rise from a panic low in March 2020 to a high in October 2021, stock markets have been volatile after that.

We have seen fluctuations in the past six to seven months; Index movements of 10-15 percent successively in both directions, in such a short period of time.

With multiple headwinds such as the uncertain geopolitical scenario in Europe, stubbornly high inflation, low liquidity and high interest rates (both global and domestic) and the risk of a downgraded earnings rating, the net result of these volatility has been to be expected.



But we also need to acknowledge that there are some positive developments. Given the significantly high level of vaccination in India and the relatively limited impact of the Omicron variant seen compared to previous waves, concerns on this front have eased. The trend in Goods and Services Tax (GST) collections has been booming.

India enjoys political and economic stability, and ranks well compared to most other large economies in terms of growth prospects and foreign exchange reserves.

Inflation has emerged as the biggest concern this year. Within the affected sectors, large firms are more willing to gain market share than medium-sized firms, in terms of their ability to absorb part of the inflationary impact.

Among other things, there may be sectors that could be relatively immune, and therefore deserve attention after a correction in stock prices.

The IT sector, for example, is unlikely to see the effect of inflation on the demand for its services; The forecast of demand for IT services is strong at the moment.

Higher wages for employees (to reduce attrition) can affect margins somewhat but may be offset by a higher US dollar.

In manufacturing, there could be specific companies that can take advantage of incentives associated with production and generate strong growth over the next two years.

While inflation will affect such companies as well, incentives can help offset this effect. Some specific sectors could continue to benefit from the structural shift from China, as alternative suppliers.

Banking Services:

The banking sector is well positioned and likely to do well in terms of margins in a high interest rate scenario (where loans are likely to be re-priced higher at a faster rate than deposits) while controlling credit costs.


Farming:

Rural growth has been a concern in the recent past, but with higher agricultural prices and the possibility of a good monsoon, we could see a rebound over the next few months, benefiting some specific sectors.

Energy and mineral stocks:

Given the uncertain geopolitical situation, we could also see select energy stocks doing well (although cyclical sectors like energy and metals are sectors that need constant monitoring by investors, and are hard to predict).

Artificial:

Another sector in which positive sentiment has prevailed but which investors need to be careful in is the industrial sector or local companies geared towards capital expenditures.

The lower figure for divestment/privatization, the higher interest cost (at the already high level of borrowing) and higher levels of crude oil may make it difficult for the government to spend as much on capital expenditures as it intended in the budget.

With the consistent selling by FIIs over the past few months, the level of FII ownership has declined. With India’s competitive advantages over many other markets, lower ownership of the fisheries industries can help increase inflows in the long run after global markets stabilize, even if the outflows continue in the shorter term.

Continued strength in retail inflows into domestic funds should continue, as stocks are one of the very few options for retail savers to earn post-tax returns in excess of inflation over the long term.

Thus, while investors need to prepare for continued volatility in the near term, the recent sharp correction in some sectors has created opportunities for long-term equity investors who want to look beyond the next two years.

(The author is the investment manager,

life insurance)

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