• We remain apprehensive of a gradual rate rise as we move through the year. We remain apprehensive of a commodity prices rise induced inflation and a gradual normalization in the economy leading to the rate rise.
• The possibility of a bear flattening of the yield curve exists with long term rates rising lesser than short term rates
• 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 in sustained surplus mode, the extreme short end of the yield curve may remain stable.

Indian markets changed track after a long time with leadership shifting to large caps, Nifty driving the markets while small caps actually turning negative (Nifty small cap 100) for the month. Some kind of mean reversion has been expected post a stupendous rally in small caps from last year lows. The markets remain driven by the increasing retail participation in equity markets, both directly as well as through mutual fund schemes while FPIs were net sellers remained during the month. Among large sectors in market; IT, Financial Services (NBFCs mainly) and FMCG outperformed NIFTY while all other sectors underperformed Nifty.

Globally, the equity markets continue to remain in positive zone, with key exceptions being China and Hong Kong. On an incremental basis, the newsflow has started becoming less positive on both economy as well as covid front. While vaccination led opening up in USA has happened, covid cases have started rising again in USA with delta variant being the cause. On economy, the supply disruptions, led by semiconductor and logistics have been driving inflation as well as camouflaging the excess demand. While auto companies are leading the brunt on semiconductor shortfall, even consumer electronics and durables are being impacted. As shipping time rising, there is an issue of adequate availability of many other goods (independent of semiconductor). It is becoming tougher globally to estimate whether demand surge is due to more consumers or less production.

While there remains a status quo from the US Federal Reserve on policy action, directionally they have indicated a path towards reducing the quantum of liquidity infusion in CY21 itself. While this is more a reduction in pace of infusion rather than an actual unwinding of liquidity, this could matter in a liquidity driven world, where investors are adding 80-90 bn$ (monthly average in CYTD21) towards equity assets. One disturbing sign has been the extent of flows (globally) moving towards ETF’s (80%+ in this CYTD21). The underlying issue with ETFs remain the lack of any informed investment decision making (valuation agnostic). On the same subject of US Fed and monetary policy, it would be interesting to observe market behaviour when tapering starts. It is a tough call to decode what has been the key driver of global risk appetite for equity assets, whether it’s the comfort of liquidity infusion or low rates. Next 6 months, would provide some clarity on whether liquidity or low rates drive investor behaviour.

In India’s context, GDP data for Q1FY22 came at 20.1% growth on a bad base of Q1FY21. In absolute terms, however, GDP for Q1FY22 is lower than Q1FY20 (two years) and that’s something to reflect upon in terms of market valuation. While markets have been driven by formalisation where corporates have been gaining market share (and profitability), at some stage we do need a bigger support from overall GDP growth. On the whole, the focus on PLI scheme and Aatmanirbhar Bharat are expected to create domestic value addition (via import substitution as well as export growth) over medium term and may help on GDP front as India is likely to move towards 3rd largest country in GDP terms in this decade.

India continues to vaccinate well with reports of having administered reaching nearly 1 crore vaccination in a single day. Clearly the expectations of economic recovery and market sentiments are based on successful post-vaccination normalisation and not factoring wave 3 of covid.

The policy action in USA on both monetary and fiscal front remains key economic variables that can drive market sentiments as majority gains have accrued on valuations arising from lower interest rates. We await USA’s fiscal policy response in September.

The result season for Q1FY22 has been good though the base effect makes any comparison with FY21 not very relevant. We remain optimistic about, FY22 likely to be a replay of FY21 where economy normalised during Q3 festive season in Q3. However, global supply disruptions are likely to hurt the earlier expectations about pace of growth.

While the power of asset allocation to equity in past 12-15 months has been seen, it is time for investors to focus on asset allocation and keep the discipline. As markets are scaling newer highs driven by more by valuations (discounting longer term horizon) and less by near term earning visibility, it is equally important for investors to have a similar time frame while investing. On a market capitalisation front, we remain more positive on large cap as an overall segment without taking away relevance of any stock specific bottom up ideas in mid and small cap, that can grow faster in rapidly changing economy.

Investors with lumpsum investments style could have an asset allocation strategy (equity as a % of portfolio) to try and benefit from greed and fear phases. Alternately, the strategy could be to really stick to longer term outlook rather than focussing on 1-2 years volatility. For investors with SIP investments however such phases are not so relevant as investor is still in accumulation phase for wealth creation over the 5-7 years. SIP may be a good alternate to avoid the behavioural traps during the extreme phases of markets. We maintain that Investors use SIP as part of core investment philosophy and use the lumpsum route during the extreme phases to top-up on their SIPs during the fearful times amidst the volatility.

For investments in debt oriented products:

• We believe that the investors with a shorter investment horizon may continue investments in ultra-short term and low duration funds
• For a medium to long term investment horizon and with a suitable risk appetite, an allocation to Short Term Fund and Dynamic Bond Fund merits attention.

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, 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.