Indian markets moved in line with global markets as the fears of “higher rates by Fed for longer term” dominated the financial markets across. US dollar continued to rally along with bond yields in US leading to a sharp correction across equity & commodity markets. A majority of global equity markets ended lower than the lows recorded in mid-June 2022. Indian markets while negative for the month have been quite resilient with key indices levels being 12-15% higher over the lows made in mid-June. Outperformance among Indian Indices was led by small cap as it fell the least. Sector wise, Pharma, FMCG & Banks outperformed while Energy, Realty, IT & Auto underperformed Nifty.

Indian markets reflect a tug of war between the “bottom up” idea called Indian economy with strong long term growth outlook on one side vis-a-vis global macro concerns in short term (war, inflation, Fed policy etc). Amidst this tussle, while global environment may suggest a re-look at asset allocation, India’s micro remain stable at present.

• 1. Rising tax collection, direct and indirect both led by improved compliance and not higher tax rates. Tax to GDP ratio is steadily improving and supporting fiscal.
  2. Healthy balance sheet across Government, Corporates & Household allowing banks a reasonable comfort as credit growth picks up.
  3. Fiscal discipline on spending. PLI focuses on addressing twin issues of job creation as well as Current Account Deficit while focus on infrastructure spend helps target productivity gains as well as complements the need to manage PLI output.
  4. Inflation, a bit higher than recent past, is in line with long term average and also quite low vis-a-vis the major global economies.
  5. Key risk remains on external front as comforts of forex reserves have gone down, partly due to currency movements and partly due to outflows on energy imports & FII outflows. Perhaps, a depreciating rupee could be an outcome of this.

Globally, environment remains concerning on geopolitics, inflation led by energy prices and monetary tightening. In a way, geopolitics and energy prices have some linkage and hence geopolitical responses to Russia’s announcement of annexing four provinces of Ukraine would be keenly monitored across global markets. Weakness in China’s economy too remains a concern, more so for global emerging markets where India too is categorized.

FPI flows turned negative during the month after a good inflow in August. The big picture remains that globally the sentiments are weak towards equity assets as a response to US Fed’s action on liquidity.

Globally, the key message from US Fed’s meeting was for a “higher for longer” policy on interest rate and quantitative tightening. “Bad economic data being good for markets” may not play out considering Fed’s stated position as on date. We believe Fed’s action are likely to have direct implications on risk appetite & valuations and hence a good strategy for investors is to focus on asset allocation. SIP remains preferred way to increase equity allocation using market volatilities.

Indian economy remains on a growth path leading the world economic growth ranking. While RBI has marginally reduced growth expectations for FY23 to 7% from 7.2%, it appears reasonable considering the global issues. As we start the festive season for Q3 and result season for Q2, the good base of similar period in FY22 needs to be factored in for better evaluation. Management commentary especially from global facing companies would be critical to understand the business implications of slowdown in global economy. Amidst the uncertainties, our investment approach remains focussed on selecting companies; with long-term earnings growth, positioned as market leaders in their respective industries, with low leverage on balance sheets, with pricing power.

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

• We believe that the investors with a shorter time horizon of less than one year should 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, an allocation to Dynamic Bond fund merits attention.

• We think the domestic rate cycle is close to its peak. While RBI may have a bit more rate hike cycle up its sleeve, the markets have largely priced in such rate hikes. With RBI projecting an inflation of 5% in the second quarter of fiscal 2024 , the time is now apt for looking into fixed income products across all duration segments. With commodity prices, barring crude, softening through the past 3 months; we think a sustained commodity slowdown will provide a respite to the retail inflation.
• The bear flattening of the yield curve specially in the 1-5 year segment has largely happened hinting at the possible end of the upward movement of the domestic rate trajectory.
• We also believe that AAA credit spreads are very tight and the probability of spreads to increase soon remains a distinct possibility.
• Liquidity being gradually normalized, the extreme short-end of the yield curve may also remain under pressure.
• With US Fed trying to engineer a soft landing to the economy, there has been historically no precedence of inflation remaining high after recession, which possibly also bodes well for fixed income allocation.

• We believe that 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 lower risk volatility.
• For a long investment horizon and with a suitable risk appetite, an allocation to Dynamic Bond fund merits attention.