The market outlook today has some serious challenges ahead. The economy is getting closer to climbing out of the Great Lockdown, China's economy is at a critical stage, and small-cap stocks are riskier than large-caps. But despite the uncertainty, quality companies still thrive.
China's economy is in a critical phase
China's economy has been in a critical phase for the past few years. The country's high growth rates and rapid industrialisation have resulted in social imbalances and environmental damage.
One of the most important challenges facing China is to shift away from a high-growth investment-driven model to one that is more sustainable. This requires a broader reform agenda that addresses institutional gaps, facilitating domestic consumption, and achieving balanced prosperity.
The Chinese government has tried to prop up infrastructure investment. However, this cannot compensate for the weakness of the property sector. The housing market fundamentals suggest that a post-2015 rebound is unlikely.
The property industry has been the linchpin of China's recent cyclical recovery. But it has lagged behind pre-pandemic trends.
Other sectors have also lagged. For example, the retail sector has not recovered from the "Singles Day" shopping holiday. Likewise, the M&A market has been dry since funding conditions became tough.
Another challenge is to improve productivity. While China is close to the innovation frontier, leaps in productivity must be driven by domestic innovations.
There are several paths that China can take. Each has its own requirements.
The most obvious is to cut nonproductive investment. Most policymakers are trying to restrict the growth of debt burdens. They are also trying to rein in infrastructure investment.
In the long run, however, the most effective solution is to re-focus on the quality of growth. It is essential to focus on improving regulation, rule of law, and equitable access to public services. These factors can help to foster a more stable business environment.
To achieve this goal, the Chinese leadership needs to revisit its longer-term objectives. It is time to reorient towards a more sustainable and productive growth model.
U.S. economy is climbing out of the depths of the Great Lockdown
The Great Lockdown is the worst economic crisis the United States has experienced since the Great Depression. It began in February of this year. Governments have been taking a number of targeted fiscal policies to help minimize the impact on joblessness and the economy.
The monetary stimulus package has not been sufficient to prevent a yearlong lockdown. The unemployment rate has soared to 14.7%, the highest since the Great Depression. In the last two weeks of March, millions of Americans sought unemployment benefits.
Real GDP fell at a rate of more than 15 percent in the second quarter. Exports and imports contributed a significant amount to the slump. Personal consumption was also negatively affected. Prices for domestic purchases declined at a rate of 1.5 percent.
Businesses and households are beginning to pick up the pace of spending. But the slow growth will continue until the acute phases of the pandemic are over.
Some economists expect the economy to continue to slide downward, perhaps even at a sharper pace. The Commerce Department's first-quarter snapshot will reinforce the predictions of analysts.
A second wave of infections could reopen regional economies and set off a second wave of lockdowns. As a result, the economy would have to go back to pre-pandemic levels to recover.
While most economists believe the economy is climbing out of the Great Lockdown, it is nowhere near its pre-pandemic level. This means the economy is heading for a double-dip recession.
With a recession this deep, the economy will probably not return to its pre-pandemic level until at least 2021. Until then, many economists predict the economy will be in a double-dip recession.
Currently, the job market is rebounding as businesses slowly reopen. However, the unemployment rate is expected to increase to teens in a few weeks.
Quality companies thrive in a recession
In general, quality companies are better off during a recession. These businesses are able to innovate and provide new products and services. They may also be able to diversify their workforce and improve their revenue streams.
During a recession, consumers tend to cut back on discretionary spending and reduce their expenditures on items that cost less. This can put a strain on a company's budget. However, this does not mean a business should go out of business. Rather, it's time to make changes.
Several quality companies have survived the recession, but only a handful have thrived. Companies like Walmart, Procter & Gamble, and Starbucks have been able to keep their employees motivated and inspired to produce the best possible work.
Businesses should do a better job of listening to their employees and soliciting their ideas. Not only will this improve the bottom line, but it will improve employee morale.
There are many other ways to boost your company's resilience. Some examples include launching a new product, diversifying your workforce, and increasing your prices to stay competitive.
Investing in a recession proof stock or fund can be a worthwhile way to generate some wealth. Be sure to have at least three to six months of living expenses in your bank account, though. If you're lucky, you'll see a bounce in your stock price as soon as the recession ends.
Another good idea is to invest in technologies that can enhance your bottom line. For example, you can invest in cloud-based software that can enable your staff to better communicate with customers, suppliers, and other members of your team. You can also use technology to automate tasks, streamline your business, and save time.
Small-cap stocks are riskier proposition than large-caps
Small-cap stocks are more volatile than large-cap stocks. They also carry a larger investment risk. However, they do offer higher returns. It all depends on your risk tolerance and objectives.
Small-cap stocks are typically younger companies. They may still be developing their business model and customer base. This could leave them vulnerable to consumer preference changes. Also, small businesses may lack the financial resources to survive a downturn in the economy.
Large-cap stocks generally have a longer history of growth and have the financial resources to weather a financial crisis. In addition, they have better reputations on Wall Street. These characteristics mean that investors are more likely to notice rapid growth in a stock.
Small-caps are also more speculative, a trait that makes them more susceptible to market downturns. Some companies are unable to raise enough money to stay afloat, especially during debt markets.
Small-caps tend to have less liquidity when trading. As a result, it may be difficult to sell shares at a favorable price. If the company is not well-established, it may have trouble raising funds for a major capital expenditure.
While it is true that the risk of investing in a small-cap is greater, it is also true that they tend to have a better ROI than larger companies. For example, a $1 billion company can double in value in a year if it is able to capture an opportunity. That is not always the case, however.
Both types of stocks are suitable for a diversified portfolio. You will need to choose carefully to get the best possible returns. Although both types of stocks can have an excellent track record, it is important to make sure that you are comfortable with their risks.
FIIs relentless selling can haunt the market
FIIs have been relentlessly selling equities in the Indian market over the past few months. This is a result of a number of factors, including rising inflation and global liquidity tightening. The global economic outlook has also been a major concern.
FIIs have sold shares worth Rs 1,64,118 crore in the last six trading sessions. While this is a hefty sum, it is just a fraction of the total equities sold in India during the month.
FIIs have also been aggressively selling stocks since October. Their outflows have coincided with a pronounced decline in benchmark indices. In fact, FIIs offloaded equities worth over Rs10,000 crore in the first seven trading sessions of 2023.
There is also a slew of other reasons why FIIs are so aggressively selling in the Indian market. One reason is because of the rupee. Whenever the rupee falls, fewer dollars are available for FIIs to invest in. This means they will have to sell off risky assets.
Another reason is that the Sensex has logged an 8 per cent drop so far this year. During the same period, the Nifty has dropped by a similar amount.
The other big factor is the Federal Reserve's rate-hike campaign. As a result, the dollar has flown out of the country. During such a situation, fund managers will be more likely to choose safe havens such as gold and US bonds.
Other positive global cues include the moderated inflation in the US. However, global risks remain overriding concerns.
One way to avoid the pitfalls of a shaky rupee is to invest in a dollar-denominated asset such as a gold ETF. Although these are considered safe havens, they could be the subject of a sudden spike in volatility.
