Indian markets continued its rally during the month, and this time the US markets led the rally with a big up move in the Dow Jones and S&P 500 Index. Amidst all the volatility of last six months, Nifty & Midcap indices are closer to their all their time highs with only the Small cap indices materially lower. Amidst the geopolitical tensions and energy/food crisis that the world is facing currently, India seems to be emerging as a safe haven and despite rich valuations, we are seeing India markets continue to outperform regional and global markets on annual basis.

Indian markets rallied with Nifty 50 Index being the best-performing and mid and smallcap indices being up similarly. Sector-wise Financials, IT and Auto outperformed while FMCG, Pharma & Metals underperformed the Nifty 50 Index. Global markets outperformed India this month.

As global markets stabilized, and we saw US yields falling off their highs, the FII flows started turning and we have Rs 8,300Crs of inflows versus the sharp outflows seen in September (~ Rs 13,400Crs). The FPI flows are yet volatile and globally the sentiments remain weak as fear of aggressive Fed rate hikes and liquidity withdrawal continue to keep everyone on tenterhooks.

Result season so far has been better than estimates with few sectors like Financials, IT and Auto doing much better with potential earnings upgrades. FMCG sector continues to get hit by weak rural demand and high RM inventory impacting margins for the quarter. Few sectors like commodities (metals and cement) and Oil & Gas sector are also showing material weakness from drop in prices.

Festive month of October has been strong with good demand across product categories as Diwali is celebrated free of Covid restrictions after two years. Rural India continues to underperform urban India currently, but we believe the Rabi season will start to see recovery.

Indian economy continues to be an oasis amid global slowdown as the reforms rolled out in the last few years start to yield results on tax collections front, as well as aid our external account by improving self-reliance. There is some pressure on energy prices front and fear of FPI outflows that has weakened the INR. However, India has managed one of the most controlled depreciation of the currency in the midst of a global crisis with INR outperforming against EUR/GBP and JPY.

Global data points have started to weaken and there is a hope that the US Fed may be closer to its target rate. With economy slowing down its highly likely that Fed may be willing to review its stance. The US yield curve has inverted, and some section of market has again started to hope for a Fed pivot. 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. Systematic Investment Paln (SIP) might remain a preferred way to increase equity allocation using market volatility.

Indian economy remains on a growth path leading the world economic growth ranking. The results so far in Q2FY23 have been good and even though commentary has started to turn cautious, downgrades to FY23 estimates are restricted to commodity sector. Amidst the uncertainties, our investment approach remains focussed on selecting companies; with near-term earnings growth, positioned as market leaders in their respective industries, with low leverage on balance-sheets and 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.

For investments in equity oriented products:

• 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, may 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.

• 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 l 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.