High time to consider a balanced portfolio

dreams of real success and imagination

The pending global correction did start; the ongoing clampdown is in the context of geo-political issues and the risk of faster Fed rate hike. The other challenges are high inflation, rise in yield, high valuations, and state elections. If there is de-escalation in the geo-political tension in Ukraine, it will be a big relief for the market. Bond yields are rising factoring in political risk, rise in inflation and interest rates. We need to know that a general increase in interest rate is not negative for a growing and stable economy. But this time, the rate hike is also in the context of moving towards normal economic situation, which may add some volatility due to the ongoing pandemic. As far as the domestic issue is concerned, state election is a passing show. Our overall view continues to be the same; we have a constructive view on equity market with moderate positive outlook. To outperform in this volatile period, focus on large caps, be stock specific and hold a balanced portfolio.

How much can be the further downside?

The short-term trend will depend on the development Russia-Ukraine standoff. Another important factor is the Fed rate hike, which is presumed to start in March. Both these points are getting factored in the rising bond yields and consolidation of the equity market. The world equity market has been very volatile, for instance NASDAQ index had corrected by 18% from 52 week high to recent low. We can have a gradual bounce in the short-term based on an optimist view. However, possibility of strong return in the medium-term is also quite uncertain. We hope that our clients have started balancing their portfolio; if not, it’s never too late and you can start executing the strategy gradually. It can be supported by a bounce in the equity market in the short to medium-term in the context of drop in risk and yield.

Budget was neutral for the market

From the economic point of view Budget 2022 was good. It was in-line with the reforms that were happening in the last 2-3 years. The positive side was the focus given on long-term capex, no negative fiddling with tax and unwanted populist measures. The budget showed no concerns about high fiscal deficit as government spending is the need of the hour when world economy and private expenditure is slow. Sector wise winners are capital goods, power, EPC construction, industrials and manufacturing.

Taxpayers and industries heavily impacted by the pandemic were disappointed as the budget did not provide any tax breaks or other sops. Direct and indirect support to the rural market was also moderated. High deficit and government expenditure will require high borrowings in the future. The huge government financing will affect the bond and equity market in the medium-term. The Budget provided no additional stimulus to the market.

What should be our current strategy?

As expected, the outperforming domestic market has started to move in-line with the global trend. For retail investors to outperform in this challenging period of high valuations and developments happening around the world the need is to focus on the themes of the future, value buying and holding a balanced portfolio. Best sectors will be IT, Pharma, Consumption, Banks, Capital Goods and Green Energy. Importantly, the market is expected to become sector and stock specific in the future. It will support stocks which are large-caps and have stable cashflow visibility, while generally mid and small caps will underperform. Instead of focusing on growth, the market will give importance to value creation, profit generation, balance sheet and stable earnings.

Why RBI provided a super dovish policy?

We would like to highlight the super dovish policy provided by the RBI in the last meeting. It was completely against the current global trend. RBI held rates and announced a very accommodative stance. Surprisingly inflation forecast was also moderate for FY23 against the current trend. RBI is expecting a fall in fuel cost in the context of recent fuel excise duty cuts given by the government, no future hike during the election period and drop in international prices in the future. RBI is also hoping for a good monsoon to moderate food inflation. A relief in global geopolitical tension will help RBI in achieving the low inflation target.

The big question is why is RBI so optimistic when global stance is hawkish and tightening as inflation is soaring. The government’s huge divestment and borrowing plans in the short to medium-term might have influenced RBI’s decision. The intention may be to maintain the status quo of the domestic financial market and not to disturb the yield and trend, as it may impact the plans. But if it does not work, market will find its own course.

The possibility of RBI maintaining such a dovish policy for a long-time is low as global inflation has become an enduring risk for the world economy. This over-optimistic view and sudden drop in recent government funding plans will help the bond market and yields in the short term. However, in the medium-term it will trend as per the global yields. The Indian equity market will also trend in-line with the global market, which is consolidating due to high valuations, supply constraints, slowdown in economic recovery and rise in interest rates.

World central banks have decided to take on this consistently high inflation, which was presumed to be transitory. The Bank of England has raised interest rates to 0.5%, back-to-back for the first time since 2004. The US Federal Reserve is expected to increase interest rates by 75bps to 100bps in 2022, starting from the next meet. It will be time for RBI to react too. However, do please note that rise in interest rate is not negative for a growing and stable economy. But, during this ongoing period of transition, moving from low rates to high rates, equity market will take time in this expensive market as we are still under the peril of pandemic.

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