Here is how you should invest after the RBI rate-hike pause

As stock prices come down, valuations become attractive when earnings are expected to grow. According to the Bloomberg consensus estimates, FY2024 Earnings Per Share (EPS) of Nifty50 stands at Rs 993 as on April 6, 2023, compared to Rs 941 six months ago.

Over the same period, the forward price-to-earnings (PE) multiple has seen a mild correction to 18.71 from 17.71. In case of small-cap stocks, the trailing 12 months PE of Nifty Smallcap 250 stood at 17.33, compared to 19.19 over the same period.

The expected growth in earnings of Indian companies, price correction in stocks and relatively strong outperformance by other emerging markets make Indian equities attractive.

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“Headwinds from active foreign investors due to the relative expensiveness of the Indian market are no longer valid. Expect better foreign investment flows into India, based on relative valuations,” says a DSP Mutual Fund report titled ‘Netra – Early Signal through Charts’, dated April 2023.

As the RBI has decided to not hike interest rates (as of now), market participants start discounting the scenario of possible expansion in PE multiples as and when interest rates start coming down.

“As interest rates are expected to stabilise and corporate earnings growth continues, we have advised our clients to allocate more to equities,” says Gautam Kalia, head, investment solutions, Sharekhan. ALSO READ: MC30 | New champions - schemes that made a fresh entry into the best MF list in 2023

Though mid- and small-cap stocks have corrected more, investors should stick to the asset allocation decided for their core equity portfolio, which should have relatively higher allocation to large-cap stocks. Aggressive investors may consider allocating some to small-cap equity funds, he adds.

Though equities turn attractive, do not expect a big rally in the near future. Most experts look at equities with a long-term view.

“The stock markets are in a phase of consolidation and given the increased volatility in developed markets, our markets too may have seen some rub-off effect. Current valuations, however, offer a good entry point to investors with a 3-5 years’ time horizon,” says Nitin Rao, CEO, InCred Wealth.

Within equities, he prefers diversified small- and mid-cap stock portfolios and defensive themes such as pharma.

Bonds stage a strong comeback

Changes in taxation rules of debt funds made many investors lock in their money in duration products before March 31, 2023. The expectation that time was the rate hike cycle was about to end. The pause makes the case strong for a stable interest rate for some time, before they actually start coming down. ALSO READ: Will SEBI push revive interest in ESG funds?

Kalia recommends fixed deposits from nationalised banks as a good way to lock in current interest rates. “There is little credit risk and no market risk. Also, these products offer interim liquidity, if need be,” he adds.

For investors keen on postponing their tax liability and want to compound their investments, debt funds can still be considered. “The accrual focused debt funds with good yields and duration funds with 5-6 years duration can be considered for investments,” says Rao.

If interest rates come down, debt funds can offer superior returns as capital gains on bonds held will inflate net asset values.

International equities

The global stock markets have seen some upward movements despite high volatility. If recession fears push global central bankers to increase liquidity in the financial system under one head or the other, risky assets, such as stocks, come back in demand.

“Indian investors should allocate money to overseas stocks from a diversification point of view,” says Kalia. He recommends investing in mutual fund schemes that allocate money to US stocks or global stocks.

Precious metals

Rising prices of gold and silver have reignited investors’ interest in precious metals. If inflation does not go down materially but interest rates are cut to stimulate economic growth, gold prices may find a significant upward push. Silver, though, may play catch-up with gold prices. In the medium- to long- term, industrial demand for silver will decide prices.

Anuj Gupta, vice-president, research, commodity and currency, IIFL Securities, has recently revised the price targets for gold and silver upwards. He foresees gold touching Rs 63,000-Rs 65,000 per 10 gram and silver touching Rs 78,000-Rs 80,000 per kg levels in CY2023.

“The possibility of dovish actions by many central bankers, which increases liquidity in the financial system, should be supportive of precious metal prices,” he adds.

What should you do?
While savvy investors may get busy making changes to their portfolio in anticipation of future events, most retail investors may be better off staying cautious with their investments.

Vishal Dhawan, Founder and CEO of Plan Ahead Wealth Advisors, says: “The RBI has made it clear that the pause does not mean an end of the rate hike cycle and the RBI will base its future rate decision on macro-economic data. The global uncertainty calls for caution.”

Investors may have to take a staggered exposure to both domestic equities and overseas equities through systematic transfer plans or systematic investment plans, he adds.

Though precious metals have done well in the last one year, do not chase them. A maximum of 10-15 percent allocation is adequate in most portfolios. It is better to keep track of your financial goals and keep investing. You may want to deploy more in case of dips, if your cash flows permit.