Indian markets continued to witness opposing flows between domestic investors and global investors. While FPIs continued their selling pressure, retail investors continue to remain aggressive buyers both directly as well as via domestic institutions. Broad markets were down with a wide gap in sectoral performances. Sector wise, Financials, FMCG & Auto outperformed while IT, Metals, Energy, Pharma & Realty underperformed Nifty. Global markets too were weak. The month-end data reflects a far better outcome vis a vis the intra-month lows across equity markets.

The Indian Economic data for Q4FY22 & full year FY22 was released. The economy rebounded strongly at 8.7% growth vis-a-vis 6.6% de-growth in FY21. In fact, real GDP is 1.5% higher than that in FY20. This is commendable as contact-intensive services sector (trade, hotel, transport etc) remains a laggard (still below FY20 levels). In terms of nominal GDP, we grew by 19.2% YoY in FY22 vis-a-vis de-growth of 1.4% in FY21. Nominal GDP in absolute terms, stood at Rs 236 lakh crores. The 8.7% real GDP growth re-affirms India’s position as amongst the fastest growing large economies. We expect the trend to continue and meet the projections by IMF, World Bank, etc. of India becoming the 3rd largest economy in this decade. As GDP grows, the per capita GDP growth will accelerate leading to a virtuous cycle of higher consumption, higher tax collection and rising investment by private sector as well as government. Corporate earnings follow GDP growth and so do financial investors. We believe the growth in economy and earnings will lead to India remaining a preferred investment destination for global investors. The headwind of US Fed tightening is perhaps a near-term cloud covering the silver lining of India’s growth path.

Globally, the key worries remain same; Fed Policy to tackle Inflation, impact of Russia-Ukraine war and Covid-19 restrictions in China.

The US Fed has laid out a policy path to tame inflation via quantitative tightening and raising rates as a reversal to its support to markets during Covid-19. US Fed took the policy action of infusing $120 bn every month for over 24 months; since Covid-19 break out in March 2020. In a way, this was Fed’s “SIP” that went in multiple markets (equity, bonds, real estate, commodities, crypto, etc). This led to excess liquidity chasing few assets and with loss-making and very low profit-making companies being excessively valued in the name of long-term growth. Now, as a part of policy reversal, Fed is starting monthly “SWP” from June 1; $47.5 bn for 3 months and then $95 bn for 12 months. The size and scale of the tightening is quite unprecedented and hence one needs to be careful of the risks to valuations.

The Russia-Ukraine war continues with worsening financial implications for inflation, global growth and markets. It has been over 3 months since war commenced and we are yet to see any tangible signs of ceasefire. The longer the war, wider will be implications on energy and food price inflation. Crude has been steady at around $110-120 range hurting many countries and companies.

Covid-19 restrictions in China are creating a supply shortage leading to inflation. A recovery in Covid-19 or some easing in business restrictions would help ease supply and inflation.

Indian economy too, is currently witnessing high inflation and may lead to some deceleration in growth. RBI at its April policy had released growth forecasts for FY23 at 7.2%. Considering the macro uncertainties, RBI may review and revise it at June meeting. Energy imports (Oil, Gas & Coal) constitute a sizeable portion of India’s imports and has implications on current account, inflation, growth as well as BoP. In FY23, RBI has also commenced its path of tightening by announcing a surprise rate hike during the month of May and stated its willingness to take further hikes if required to control inflation. From fiscal policy perspective, government has taken steps of curbing inflation by imposing restrictions on exports so as to improve local availability at lower prices. These acts hurt exporting companies, but end up helping the consuming companies, making some shift in profit pool among sectors and companies.

The quick resolution to Russia-Ukraine conflict and Covid-19 in China are pre-dominant variables for global economic stability and financial markets. The US Fed policy normalisation is more likely to impact asset valuation. Globally, the key risk in equity markets is the reversal of the high valuations as the Fed moves ahead on the tightening path. Already, we have seen companies with “poor earnings/cash flows at present but expectations of higher and longer-term growth” being hit more in markets vis-a-vis companies having near-term growth and cash flows. The divergence in performance between NASDAQ & Dow Jones Index illustrates the same. Nasdaq Index represents growth companies, while Dow Jones Index represent value companies generating cash flows in near-term.

For Indian economy and corporates too, the implications are similar. High inflation typically creates margin pressure as well as demand contraction and hence earnings estimates could get downgraded. The Q4FY22 results have been good on an overall basis though the raw material and energy costs have hurt margins for some. However, the real impact is likely to be felt in Q1FY23. Amidst the uncertainties, our investment approach remains focussed on quality companies who are market leaders in their respective industries having least leveraged balance sheets and some pricing power for their products. Challenge to Indian markets is sizable selling by FPIs since October 2021.

Asset allocation to equities creates wealth over long term as growth rewards equity assets. Growth outlook turns volatile at various times due to multiple factors. History has shown that equity assets acquired during volatile times deliver better returns over longer term. We recommend

• 1. Conservative investors continue to use systematic investment route and avoid the market timing worries.
  2. Aggressive investors can attempt market timing via lumpsum investments.
  3. Balance investors use “Balanced Advantage route”. This allows fund managers the flexibility of shifting asset allocation and time the market during volatility.

• Our view is that volatility may continue and SIP may be a good way to increase equity market allocations
• Investors looking to invest for a medium to long period, can consider SIPs or STPs into focused, multicap or hybrid funds based on risk appetite.
• Investors looking for a better return opportunity and with a suitable risk appetite, may consider part allocation in mid cap fund as well.

• While we continue remain apprehensive of a rate rise as we move through the year, we believe the first half of the current financial year may mark the terminal value of the rate rise phenomenon.
• The possibility of a bear flattening of the yield curve, especially in the 1-5 year-segment remains high with the start of the rate hike cycle
• We also believe that AAA credit spreads are very tight and the probability of spreads to increase in the near future remains a distinct possibility
• Liquidity being gradually normalized, the extreme short-end of the yield curve may also remain under pressure

• We believe that the investors with a shorter time horizon of less than one-year may continue investments in ultra-short term and low duration funds
• Short term fund category may be suitable for investors looking to stay for a time horizon beyond one year with a lower risk volatility
• For a long investment horizon and with a suitable risk appetite, a small allocation to Dynamic Bond fund merits attention