Thread by @PrasadWakchaure

A thread on #Stagflation

Stagflation has been a buzzing word since Friday. Let's understand the concept and how it will impact our equity investment in the near future.

The below pic is very informative showing the implication of inflation on GDP growth.

Economists across the world are trying to interpret the present situation and making their consensus on the most likely upcoming stagflationary phase followed by the Global recession. Economists are cutting their GDP growth forecasts & raising inflation projections.

How is this buzzing suddenly? On Friday gap between yields on US02 year and US10-year notes stood at its narrowest since March 2020, a signal that investors may be anticipating that economic growth will slow down from its current robust pace.

STAGnancy in GDP growth due to skyrocketing inFLATION lead to STAGFLATION. This is considered worst than inflation. Stagflation is a combo of stagnant economic growth, high unemployment, and high inflation.

In this stagflation situation, policymakers face a dilemma since actions intended to lower inflation such as increasing interest rates may lead to a recession in the economy. reuters.com/world/europe/i…

In the current scenario, possible stagflation can occur due to a supply shock of commodities like oil, food, etc due to ongoing war and a cartel among producing nations. Hereon, production becomes costly and businesses become less profitable hence EPS degrowth.

If oil and food inflation is curbed by increasing interest rates, GDP will slow down further. Current USA GDP growth is +7% and inflation is +7.5%. Speculators are projecting situations like the stagflationary year 1970 when GDP growth was half of the inflation.

Hyper inflations can destroy the countries. Two recent examples are Venezuela and Turkey. Former has seen a drop in GDP from $350 billion to now $50 billion in 10 years. Turkey's inflation has surged to 20 year high of 48% after dropping in interest rate in September 2021.

If the US and European economies go into recession, past history suggests this will spread all over the world. The recessionary phase might stay for 2 years like 2007 and 2019. Indian small and mid-cap has seen a tough phase during 2019 if you remember.

The current Nifty EPS is Rs 775 and PE is 21 which investors are considering a good buying zone. They are projecting EPS growth of 15 to 20% in the next two years, hence Nifty forward PE become more lucrative. Opposit to this, what if recession becomes reality across the Globe?

A 10% drop in Nifty EPS will make Nifty PE 23 and a 20% drop will make it to 26 which is a highly expensive buying zone.
Export-oriented sectors like IT services and pharma would get hit first. The domestically oriented stock might do well for some time.

But less export due to global slowdown would lead to more unemployment and hence slowdown in the domestic economy. That's why high inflation is bad for equities, particularly small and mid-cap stocks. The coming few weeks are crucial to the market.

If war continues further, crude projections are $150-190, producing nations that are cartelizing and trying to take advantage. Saudi earned $150 billion during 2021 now poised to earn $350 billion during 2022.

Further fall in rupee, hyper crude, and food prices (imported fertilizer, edible oil, etc) will make imports expensive and hence lead to high inflation in India. FII are selling relentlessly past few months. Overall it's making a bearish picture for the near future.

There are many if and buts and probabilities. We might see the complete opposite situation and can see a bullish scenario. Let's wait and see where we are headed. Keeping some cash than being adventurous will be more beneficial during 2022-24.

END of the Thread.