Recession unlikely in India but stagflation a real possibility: Bernstein

Rupal Agarwal, Senior Research Analyst-Asia Quantitative Strategy, Bernstein, said that stagflation is becoming a real possibility in India. She, mentioned that slowing growth isn’t something the market is pricing in. She, however, clarified that she is not expecting recession in the economy.

"We are definitely getting into that space where stagflation is becoming a real possibility when it comes to India. Slowing growth is one of the bigger risks out there, which I don't think market is yet pricing in. The way that we define stagflation is higher inflation and slowing growth, so it need not translate into an actual recession and we are definitely not anticipating a recession to play out, but it is more about slowing growth," she said.

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Sectors like materials and energy will be interesting to watch out for, she mentioned.

"Materials and energy are two interesting plays. They are classic inflation-sensitive assets, which tend to do well when inflation is moving higher. So, in the short-term, I agree, there should be some exposure to these two sectors. But as growth concerns become more elevated, these two sectors need to be watched out for," she said.

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She explained that there are less catalysts for the market to move higher now. However, as a strategy, she recommends high quality as the key style to look out for and the current high-quality portfolio in India is most positive on technology and staples along with financials.

"I think in our view, the overall risks are still weighing in more; there are less catalysts for the markets to move higher, and hence we are still positioning or recommending a more defensive position overall for the market. So, in my mind, we are not out of the woods yet overall for the markets," she said.

"We are recommending high quality as the key style to look out for and if we look at the current high quality portfolio in India, it's most positive on technology and staples, along with financials," she added.