Inflation Will Fall. Add These 5 Stocks to Your Watchlist

A few weeks ago, retail inflation, i.e. the price rise impacting household budgets, hit a 15-month high of 7.44%.

There is no doubt that rising prices of almost everything is hurting the Indian consumer. There’s also no doubt that inflation will stay high in the short term. This is due to the demand driven by spending during the festival season.

But what if we look beyond the next few months? Is inflation likely to stay high all throughout 2024?

Chances are good that the opposite will happen.

There is an old saying in the commodity market – ‘The cure for high prices is high prices’. In other words, the problem of inflation will solve itself.

The reason for this is simple. When prices rise, people notice the impact it has on their wallets. This may not be a big problem immediately, but as the months pass, more and more people feel the pinch.

And one by one, they start cutting down on consumption. There’s no rocket science here. It’s economics 101.

First, the poorer sections of society cut back on spending. Then the middle class and then the wealthy.

In India right now, the poor and middle class have already cut back. Sure, there will be some discretionary spending during the holiday season over the next few months. However, expecting the middle class to play the lead role in driving the Indian economy in 2024 is asking for too much.

That leaves only the wealthy who will be in any position to spend enough money to meaningfully drive economic growth next year. But this is a small segment of the population and won’t move the needle on inflation too much.

Then, there are global factors that will keep a lid on inflation.

Most of the developed world will likely be in a recession or close to it next year. This will keep commodity prices, including the price of crude oil in check.

The big Chinese economic recovery, that everyone expected this year, has also not come about. This means the world’s biggest growth engine will not contribute too much to the demand for goods that it imports.

These include everything from basic commodities like coal and oil to intermediate goods and high-value finished goods.

Thus the prices of most goods across the value chain will not get any support from demand.

Well, aside from crude oil, the supply of which is tightly controlled by OPEC and Russia, there aren’t any serious problems on the supply side as far as India is concerned.

Thus we can conclude that barring unforeseen circumstances, inflation in 2024 is unlikely to rise significantly from current levels.

In fact, if the US goes into a recession, we likely see a fall in crude oil prices, which in turn will reduce inflation in India.

Keeping this in mind, here are 5 stocks that deserve a place on your watchlist in a falling inflationary scenario…

#1 SBI

State Bank of India (SBI) is a logical choice for this list as it stands to benefit from falling interest rates, which could result from falling inflation.

This correlation is not a sure thing however and investors will do well to consider many other factors affecting banking stocks.

But if inflation were to fall in 2024 it’s not a stretch to imagine the stock of SBI doing well. In fact, we won’t be surprised if the smart money in the market is already thinking along these lines.

Fundamentally too, the bank is doing well. Last month, it reported a 178% annual increase in standalone net profit at ₹168.8 billion (bn) for the June quarter.

The bank has also reduced non-performing assets (NPAs) significantly over the last few years. Its gross NPAs in the June quarter was 2.76% compared to 3.91% last year.

#2 Bajaj Finserv

Bajaj Finserv is a is the holding company for the various financial services businesses under the Bajaj group. It was formed in 2007 as a result of its de-merger from  Bajaj Auto  and is the holding company for the businesses dealing with financial services of the Bajaj group.

The company provides solutions for asset acquisition, asset protection, family protection, and income protection, in the form of life & health insurance as well as retirement & savings solutions.

The stock has recently undergone a stock split in the ratio of 1:5 and a 1:1 bonus issue. This has massively increased the liquidity of the stock.

Recently, concerns over its main holding, Bajaj Finance, have kept the stock under pressure. However, the long-term fundamentals of the company are solid.

Just like the logic behind SBI doing well in a falling inflationary period, this well-managed NBFC should do well too.

#3 Mahindra & Mahindra (M&M)

M&M is likely to do well in a period of falling inflation due to two reasons.

First, its raw material costs are likely to go down.

Second, falling interest rates, which could be a response to falling inflation, could boost sales of its SUVs and tractors.

In fact the company’s sales performance has been great even in a high inflationary scenario.

It reported a 21% increase in domestic passenger vehicle sales at 32,588 units in June 2023, compared to June last year. M&M also sold 32,585 units of utility vehicles last month, against 26,620 units a year ago, a growth of 22%.

Sales of three-wheelers, including electric 3-wheelers, were at 6,377 units in June 2023, compared to 4,008 units in June 2022, a growth of 59%.

Last financial year, the company’s sales and profits were up 34% and 56% respectively.

#4 Bajaj Auto

Bajaj Auto is another company that is likely to do well once inflation falls. Falling steel prices have already improved the outlook for profitability.

The stock has been subdued over that few months but the long-term fundamentals of the company are solid.

In fact, the company’s recent performance has also been impressive. In the June 2023 quarter, Bajaj Auto sold over a million units, a rise of 10% year on year (YoY).

Growth in the last quarter was powered by a 73% YoY rise in two-wheeler sales in the local market to 542,931 units. This was considerably higher than the near 9% YoY fall in unit sales in FY23.

Its recent launches have also been well received. The company has launched the Triumph Speed 400.

The company has more launches lined up. It also has big plans in the EV segment in the long term.

#5 ITC

ITC is going to be a huge beneficiary of falling raw material prices. The company is a leading player in the tobacco, FMCG, hotel, and paper, sectors.

It has created strong brands and thus, a demand slowdown won’t affect it too much. However, falling raw material prices will help support margins and profits.

The paperboard and FMCG businesses in particular will benefit from a falling inflation scenario.

The company’s long-term fundamentals are very strong and has a clear, generous dividend policy. The company’s management has said that dividend payouts will be stepped up to about 80-85% of the post-tax profits. ITC’s dividend payout ratio in the financial year 2022-23 was almost 100%.

The recently announced demerger of the hotel business is the icing on the cake. The value unlocking resulting from the demerger could be another trigger for the stock in 2024.

Disclaimer:  This article is for information purposes only. It is not a stock recommendation and should not be treated as such.