The onset of 2022 saw turbulent clouds looming over the US economic sitch. While the Federal Reserve oscillates between curbing inflation and averting a hard landing for the economy, the stock market is plunging.
This slip in the financial market is expounded clearly by an instance involving Nvidia (NVDA). It used to trade at $300 to $320, with a revenue multiple (Market Cap/Yearly Revenue) of 25. But now, the same stock trades at less than $120 with a revenue multiple of just 10. While the company fundamentals have hardly detracted from its core strength, a vertiginous descent in its stock price draws our eyes toward the bigger picture; the glaring levels of uncertainty in the global economy.
The prevailing Russia-Ukraine war jostled the stagflation environment by continued supply chain problems when it was already floundering from the onslaught of the Covid-19 pandemic. In the midst of it all, Europe has been the epicenter of this financial apprehension, where the geo-political risks and energy crisis continue to intensify. The scorching heatwave, drought, and worries of real estate have made way for problems in even China too. Other emerging markets are facing the challenges of a strong dollar and high-interest rates hitting the financial sector. As a result, developing countries with weaker economic fundamentals are unlikely to comply with the hiked interest payments, leaving them stranded in the debt swamp.
In the US, the inflation rates are running amok at 8.5% year on year, way above the Federal Reserve’s 2% target. These pronounced inflation rates are the microcosm of the blatant shift in the economic ecosystems. It has backed the Fed into a corner of aggressive policy tightening. They have no other option but to keep the paddle on increasing the interest rate, posing risks to the growth outlook; simultaneously impairing both equity and bond markets.
So, when the world is in a state of such economic unrest, it all boils down to the million-dollar question. Where do we invest?
Cash? Bonds? ETFs? Cryptos? Gold? Equities?
The current scenario of the stock market is metaphorically a storm brewing in the tranquil sea of the global economy. And the most effective way to steer its course is to invest in the right sectors with balanced diversification. Sectors such as Energy, Utilities, and Consumer Staples will add more stability to any portfolio in these times. Investors should focus more on stocks with robust fundamentals and strong pricing powers (the ability to pass on the increased pricing to the consumers). These stocks will likely have burgeoning free cash flow yields and strong operating margins.
In these turbulent times, we must shore our fences. As Howard Mark once said,
“Change is inevitable. The only constant is impermanence. We have to accommodate the fact that the environment changes. We cannot expect to control our environment.”
