Market Volatility: Take the Defensive Approach

The equity market experienced a significant downturn last week, following a surge in frontline indices to all-time highs. Several factors contributed to this heightened volatility. Primarily, the recent escalation of tensions in the Middle East, particularly between Iran and Israel, cast a shadow over the global markets. Global stock markets, inherently risk-averse, react strongly to geopolitical instability, prompting investors to retreat from riskier assets like equities and opt for safer havens such as gold and US Treasuries.

Besides, the Middle East remains a critical region for global energy security, with any disruption to oil production or transportation routes potentially triggering price spikes. Given that India imports 85 per cent of its crude oil requirement, any significant price increase due to regional conflicts could adversely affect our economy, leading to higher fuel costs and inflationary pressures affecting various sectors from transportation to manufacturing.

Till now, India’s inflation, measured by the Consumer Price Index (CPI), remains within the comfort zone of the Reserve Bank of India (RBI), with the latest CPI perched below 5 per cent at 4.85 per cent, the lowest in the past 10 months. In contrast, the US witnessed a rise in CPI to 3.5 per cent in March, exceeding market expectations. This has led analysts to revise their projections for interest rate cuts this year from four down to two. And in some extreme cases, economists are expecting a rate hike if inflation remains at an elevated level.

Consequently, the 10-year benchmark US Treasury yield reached a five-month high above 4.5 per cent, negatively impacting the equity market. This is also prompting foreign institutional investors (FIIs) to shift towards US bonds offering better yields. Adding to the above market uncertainty, recently there was an amendment to the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius, introducing the Principal Purpose Test. This amendment has the potential to nullify the ‘grandfathering’ provision, exposing even investments made before 2017 to fresh scrutiny.

Under the previous 2016 amendment, investments from Mauritius made until March 31, 2017 were exempt from capital gains tax in India, while those made after April 1, 2017 were subject to Indian tax laws. Following this change, foreign institutional investors (FIIs) sold over `15,000 crore worth of domestic equity. For retail investors navigating this market landscape, strategic portfolio positioning is paramount. Consider integrating defensive sectors that tend to demonstrate resilience or even flourish amidst uncertainty. One such sector is pharmaceuticals. Within the pharmaceutical sector, contract development and manufacturing organisations (CDMOs) appear particularly well-suited at present.

Both domestic and international companies are increasingly using the services of CDMOs for various purposes, including drug development, regulatory support, and risk-sharing. These collaborations expedite project timelines and ensure cost-effective manufacturing at scale, all the while upholding rigorous quality standards. Our cover story delves deeply into the dynamics of this sector, its scope, and the opportunities it presents, equipping you to make well-informed decisions. Infrastructure presents another promising sector for investors with a horizon of over three years. In one of our special features, we extensively explore the diverse types of infrastructure and the opportunities within each sub-sector, including roads, railways and construction.

Additionally, a significant current development is the sharp increase in gold prices, which has surpassed `70,000 per 10 grams and is poised to climb even higher amid ongoing global macroeconomic uncertainty. In this edition, you will discover insights into companies affected by gold prices, whether they are in the jewellery or gold loan sectors. Continue to leverage the information provided in this edition to make well-informed investment decisions.

RAJESH V PADODE
Managing Director & Editor