Indian equities: an outlier
Indian equities have been an outlier this year, with the benchmark indices Nifty and Sensex delivering positive returns, compared to a double-digit decline of its counterparts in many global markets. This is despite global headwinds such as high inflation, rising interest rates, currency swings and geopolitical uncertainties.
“The driving force behind India’s outperformance has been a pick-up in the capital expenditure by the Central government which revived the Indian economy from the Covid-led slump and led to strong consumption demand. The combination of these factors resulted in strong corporate earnings growth of 24% CAGR over FY20-22," said Hemang Jani, head of equity strategy at Motilal Oswal Financial Services.
Having said that, the mid and small-cap segments could not elude the broader market sell-off. Despite this correction, they are still trading at a premium to large-caps, said V.K. Vijayakumar, chief investment strategist at Geojit Financial Services.
As for the US markets, which is the Indian retail investors’ favourite destination for international diversification, Prableen Bajpai, founder of FinFix and Analytics Pvt. Ltd, said, “this period of turbulence presents good buying opportunities. Sadly, as investors, we fall for recent biases and ignore what doesn’t look good at a point in time. Investing outside home markets is a good strategy as it brings a different flavour of stocks and sectors, in addition to currency diversification. However, it can work only if one understands the non-linear path of investing and be patient during such trying times."
While equity is expected to witness higher volatility in the next few months, as per experts, it is an important asset class that can beat inflation in the longer run.
Debt: higher volatility
The year saw the fastest clip of interest rate hikes by central banks across the world. As a result, yields on debt instruments spiked sharply. The rise in yields impacted returns from debt instruments as the price of bonds decreases when the yield goes up.
The longer-tenure sovereign bonds (which most long-duration and/or gilt funds invest in) have been the worst hit this year. Though the extent of the jump in yield was higher in the case of liquid instruments such as T-bills, the impact has been minimal as the maturity period of liquid or low-duration funds is much lower. The probability of the market value of bonds going down has come down meaningfully, with the cycle of interest rate hikes in the country nearing its end, according to Pankaj Pathak, fund manager-fixed income, Quantum AMC.
When investing in debt funds, it is important to match the investment horizon with the portfolio maturity of the fund to lower the impact of volatility. Joydeep Sen, an independent debt market analyst, said people would be better off investing in moderate-duration funds such as corporate bonds and banking and PSU funds with a tenure of about 3-5 years. He also said target maturity funds—open-ended index funds that passively invest in government securities and PSUs—of suitable tenure are a good option if the investments can be held till maturity.
Gold: aided by the rupee’s fall
In 2022, the reputation of gold as a hedge against inflation was tested. While the yellow metal has been the top performer among all the conventional asset classes with a 12% return in rupees, the performance has been negative in dollar terms. This difference between Indian and dollar returns can be significantly attributed to rupee depreciation vis-à-vis the dollar.
“While geopolitical tensions in the first half and the crypto meltdown in the second half increased gold’s appeal during the year, rising interest rates have kept gold prices under pressure," said Siddharth Vora, head of investment strategy and fund manager–PMS, Prabhudas Lilladher. “We expect gold to add value to the portfolio by bringing diversification amid rising volatility and subdued appetite for risk assets. From an asset allocation perspective, gold reduces portfolio volatility as it has a low correlation with other risky assets," added Vora.
Real estate: patchy returns
As various reports suggest, the Indian residential real estate space witnessed a healthy demand in 2022 due to various reasons such as low-interest rates and developer discounts. But the increased interest in the space has not reflected in the value appreciation of assets. As per the RBI housing price index, prices of houses have gone up by just 1.4% in 2022.
Anuj Puri, chairman of ANAROCK Group, said, “prices rose between 3-5% in most urban areas. Tier 2 and tier 3 cities like Ahmedabad and Lucknow saw increased buying sentiment and ramped up their potential as the future growth engines of the Indian real estate market. However, any further repo rate hikes could impact demand, especially in the affordable housing segment which is particularly price-sensitive," added Puri.
Real estate investment trusts (Reits), which invest in commercial properties in India, aid in portfolio diversification and have also gained traction.
Asset allocation: the holy grail
Asset allocation has been a time-tested method to contain losses in any market scenario as it balances risk and reward aspects of the portfolio.
According to Nitin Shanbhag, head of investment products, Motilal Oswal Private Wealth, “asset allocation should always be based on the risk profile of investors, notwithstanding their age. For example, a senior citizen could continue to maintain an aggressive risk profile (higher equity allocation), while a new-to-market investor can adopt a conservative risk profile to start with."
