The tragic conflict in Ukraine tells us an uncomfortable truth. The world is far more restless today than it has been in decades, and negotiating the many issues that have cropped up in quick succession requires more flexibility, agility and collaboration than ever before – between governments, communities, individuals and businesses. The challenges seem unrelenting; Ask any CEO. As if Covid uncertainty wasn’t enough, it has been made worse by rapidly rising global inflation and ongoing supply chain disruptions. Central banks have stepped in, notably the US Federal Reserve, which reinforced its hawkish stance after Chair Jerome Powell said a half-percentage-point rate hike “will be on the table” at their next meeting. This has further confused the markets.
The Reserve Bank of India (RBI) could also be prompted to hike interest rates by up to 50 basis points at its June meeting. Essential goods and fuel prices are likely to remain high. The signs are clear: India’s retail inflation hit a 17-month high of 6.95% in March and wholesale inflation rose to a four-month high of 14.55%. So, we are heading for a reversal in interest rate policy and the liquidity environment, which could result in significant economic damage over time, particularly for those who ignore the stress that can accumulate over time as major macro shifts materialize. This stress does not manifest itself immediately, but will manifest itself over time and in many areas that are difficult to predict.
Then there is the Russia-Ukraine war. As if his senseless human suffering weren’t enough, the uncertainty of when it will end – and whether it will pave the way for peace or future conflict – is unnerving in political, diplomatic, and business circles.
Added to this is the massive energy shock caused by the conflict. Have oil prices peaked at $139 a barrel or will there be more peaks? Crude oil prices remain volatile. In addition, the war has prompted a “huge jump” in global food prices to another record high in March.
The storm will be ‘perfect’: If all of that wasn’t bad enough for politicians and business leaders trying to recover their economies from the Covid hits of 2020 and 2021, we have China’s recent infection surge and lockdowns. Given its trade links, this will accentuate inflation problems everywhere.
So now we have an energy shock coupled with rising food and manufactured inflation. And rising interest rates. This storm was made “perfect” by the Fed’s words, which spooked financial markets.
If you’re feeling the heat, you’re not alone. Listen to this recent statement from Powell: “Nobody expects that in the current context, achieving a soft landing will be easy – very little is easy in the current context.”
For India, the mystery or blessing so far is that despite rising energy prices, inflation – although now above the RBI’s target – is not rising as much as in other major economies. And notwithstanding the IMF’s recent cut of India’s economic growth forecast for 2022-23 from 9% to 8.2%, India is still the fastest growing major economy in the world – a feat.
As a result, we have a two-pronged situation, with the world in general experiencing rising inflation and interest rates, falling stock markets and a commodity price shock. On the other hand, India still has relatively benign inflation, subdued interest rates and a relatively resilient stock market environment. Yes, commodity prices have gone up, but it hasn’t had that much of an impact.
Avoiding a shock too far: How should companies respond to this never-ending volatility? How does one accommodate such endless unpredictability in a “new normal”? The biggest financial problem is the liquidity cycle reversal. Such changes take a while and need time to filter through the global system. Liquidity is beginning to dry up and the international bond markets are already shaken. The longer this reversal lasts, the worse the stress becomes. With financing being an integral part of all businesses, rate hikes will eventually impact profitability across all sectors, especially in debt-heavy areas like real estate. The stress will likely be felt over a 9 to 12 month period. Stressed company managements have to arm themselves.
Second, with commodity inflation, the risks to executing long-term projects have increased, both from capital costs and interest rates.
Third, stock valuations can take time to catch up and may differ due to differing fund flows in the public and private markets. Therefore, capital allocation and acquisition strategies must be fluid and responsive to frequently changing market conditions. In this environment, one cannot commit to a single strategy; Agility will be critical as organizations navigate turbulent conditions.
In addition to the challenge, the ratings will fluctuate wildly. We are already seeing this with newly listed technology companies. Different sectors will suddenly find favor and then be rejected by the markets at different times. There is no point in basing long-term strategic decisions on short-term market movements; Rather, one must focus on longer-term value creation and let distractions take care of themselves, no matter how tempting some of them may seem.
The unicorn boom seems to be coming to an end. Employees may not see it yet and could continue to be attracted to startups; These are decisions you may regret. But many employers in this space will likely need retention strategies, and HR departments will have their jobs cut out if they want to keep good people.
So prepare for a rougher ride in the coming months. The advantage of India is that our financial sector is now healthier, companies have largely deleveraged and demand is finally picking up. However, both government and the corporate world will need to be extremely quick-footed and conduct continuous monitoring of “war room” conditions over the next year or so. If short-term external shocks can be weathered, India may experience several years of much-needed high and sustained rates of economic growth.
Sumant Sinha is Chairman and CEO of ReNew Power and President of Assocham
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