Though one calendar quarter is too short a period to change one’s investment strategy, I have a habit of reviewing my assessment of markets and investment strategy every quarter. In my last Outlook and strategy review, I had highlighted that given the present circumstances, the outlook for the next year is pretty simple and straightforward. The return expectations of the investors may be moderate and focus may remain on capital preservation. I therefore continued with my standard asset allocation, and decided not to trade actively.
In my latest review of market outlook and investment strategy I noted the following:
(a) The economic recovery post pandemic continues to be uneven. The larger unorganized sector continues to lag, while the formal sector is progressing well. The tax collections are therefore buoyant, and fiscal pressure is not constricting the public sector spending. The overall consumer demand growth however remains poor. The overall economic growth estimates have therefore been downgraded moderately.
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(b) The consumer demand is also impacted by stagflation like conditions, as higher energy and food bills have eroded the discretionary spending power of a larger section of population. The real income of consumers is not growing or even de-growing in many cases. There are no signs of any material change in this condition in the next few months.
(c) Easing of COVID related restriction and Russia-Ukraine war has added to the exports momentum. Higher petroleum products and gold prices have materially added to the nominal value of exports from India. Despite highest ever exports, the current account deficit has continued to rise. The RBI has managed the currency market very well and INR exchange rates have remained much stable.
Also Read: Investing in global markets in the backdrop of the Russia-Ukraine war
(d) The financial sector has stabilized after a few tumultuous years. The asset quality has shown remarkable improvement and stability in past one year. The credit growth though has remained slow, the earnings of banks have been aided by good recoveries. In the past couple of months some encouraging signs of credit demand pick up have been sighted. Hopefully, credit growth will gain momentum in next few months.
(e) The commodity prices are showing early signs of peaking on demand destruction and easing of logistic constraints. The rate hike cycle initiated by most central banks may hasten the process of commodity prices peaking, in my assessment.
(f) The central banks in most jurisdictions have commenced hiking the rates and tightening liquidity. This may adversely impact financial asset prices, especially the leveraged equity and commodity trades in the next few months.
(g) Higher inflation and poor pricing power (mainly due to poor demand growth) may continue to hurt the margins of many companies. As I had expected, the market has started to take cognizance of lower margins and poor volume growth in many sectors. The analysts have started to assign lower PE multiples in their forecasts. The earnings estimates may also be aligned with the new reality post 4QFY22 results. As the weight of expectations comes down, the market might trade much more comfortably for the rest of the year.
(h) Geopolitical situation in Europe seems like part of a much larger Reset in global order. The contours of this reset will unravel in the due course.
History may not be a guide
The economic and market cycles are now becoming much more shallow as compared to the 80s and 90s. The recessions nowadays last for a couple of quarters, not many years. Inflation peaks at 7-8%. Despite all the brouhaha over unprecedented QE and uncontrolled inflation, US rates are expected to peak at 3%. In India also bond yields are expected to peak around 7-7.5% despite higher fiscal deficit and high inflation. The market corrections (except the knee jerk reaction to pandemic led lock down) are also shallow and short lived. Unlike in the 1990s and early 2000s, we no longer see 20% plus correction in benchmark indices more frequently now.
The point is that defining market outlook and defining an investment strategy on the basis of that must factor in the new trend of shallow cycles. Relying on historical data of deep cycles may lead to unsatisfactory results.
Market outlook
The market movement in the first quarter of 2022 has been mostly on the expected lines. Despite the ongoing conflict between Russia and Ukraine, I do not see any reason to change my market outlook for the rest of 2022. I continue to expect-
(a) NIfty 50 may move in a large range of 15200-19200 during 2022. It would be reasonable to expect 10% + 2% return for the year for diversified portfolios. Focused and thematic portfolios could return higher yield in 2022.
(b) The outlook is positive for IT Services, Financial Services, select capital goods, healthcare and consumer staples, and negative for commodities, chemicals, energy and discretionary consumption. For most other sectors the outlook is neutral.
(c) Benchmark bond yields may average 6.5% + 30bps for the year. Shorter end yields may do better in 1H2022, while longer duration may do better in 2H2022.
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(d) USDINR may average close to INR75-76/USD and move in the 73-80/USD range on a negative current account. Higher yields may attract flows to support INR.
(e) Residential real estate prices may show a divergent trend in various geographies, but may generally remain stable. Commercial real estate may remain best category
Investment strategy
2022 may be one of the simpler years for investors, as the return expectations may be moderate and focus may turn to capital preservation.
I shall continue to maintain my standard allocation in 2022 and avoid active trading in my equity portfolio. My target return for the overall financial asset portfolio for 2019 would be 9 to 9.5%.
Asset allocation
Equity investment strategy
I would continue to focus on a mix of large and midcap stocks. The criteria for large cap stocks would be growth in earnings; while for midcaps it will be a mix of solvency & profitability ratios and operating leverage.
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