February has been a volatile month for the Indian markets. While the Budget 2020 and RBI maintaining status quo on policy rates supported the markets, negative global trends like rising US inflation, hike in US treasury yields, escalating geopolitical tensions between Russia and Ukraine kept the overall market sentiment lower.
The benchmark indices have fallen a little over 2 percent in the first half of February. Concerns of an aggressive rate hike by the US Fed on the back of rising inflation and surging crude oil prices also kept the markets on their toes. Further, a weakening rupee led to massive outflows by foreign investors. FPIs sold Indian equities worth ₹14,935 just in the first half of February.
So how should you allocate your assets - equity, gold, debt to recalibrate your portfolio amid this volatility. Axis Securities tells you:
Equities
As per the brokerage, 2022 is likely to be a transition year with the toned-down expectations from the equity market returns and the volatility is likely to continue for some more time before it concludes on a concrete trend. The direction of the bond yields, oil prices, and dollar index, faster tapering by the US FED, and the inflation risk will further drive the market fundamentals in the first half of 2022, it noted.
"The equity market may not deliver stellar returns in the next year as it had delivered in 2021, but 2022 is likely to be a year of balance sheet strength, driven by significant improvement in corporate profitability. With current valuations offering limited scope for further expansion, an increase in corporate earnings will primarily drive the market returns moving forward," Axis Sec explained.
The brokerage remains 'overweight' on equities, however, it believes this to be the right time to review the entire portfolio and recalibrate it with the initial target allocation to bring down the overall portfolio risk.
Asset allocation and sector rotation will be the keys to generating outperformance in 2022, it added. While exposure to equities should not be reduced, focusing on ‘quality’, bringing down portfolio risk through specific sectors, and recalibrating stocks to the initial target allocation should be a key strategy going forward, the brokerage advised.
It values Nifty50 at 22x FY24E earnings and maintains its December 2022 target of 20,200.
Fixed income
The slope of the yield curve has been flattening since Oct’21 against the steepest curve seen in the earlier months led by the policy support. In the February 2022 MPC, the RBI maintained a status-quo, kept the repo rate unchanged, and has continued with the accommodative stance as long as necessary to revive and sustain growth while continuing to mitigate the adverse impact of the Covid-19 on the economy.
The brokerage believes that the yield curve to flatten going forward with the shorter end of the yields moving higher in 2022 as compared to the higher end of the yield. Furthermore, the higher end of the yield remains cautious due to the policy normalization and the higher government-borrowing program for FY23, which was highlighted, in the Union Budget this year. However, it added that with policy normalization, the yield curve is likely to go normal going forward as against steeper from the last few quarters.
Also, the market will continue to monitor rising Brent crude prices, the direction of the dollar, and the global policy changes in the near term, the broekrage stated.
It further noted that since the last few months, the primary activity is gradually picking up with credit spreads easing, especially in the AAA category.
"While these attractive investment opportunities are emerging in selected non-AAA-rated bonds, their spread with AAA-rated bonds continues to remain at elevated levels vis-à-vis the historical average. This suggests risk aversion is still in place. Going forward, an improvement in the growth outlook and ample liquidity may lead to broad-based moderation in credit spreads. Given the high uncertainty over the interest rate trajectory, it would be prudent for the investors to be conservative," Axis Securities said.
Keeping this backdrop in view, it continues to favour a Quality approach in bonds with some non-AAA exposure based on individual risk appetite.
| TARGET PORTFOLIO ALLOCATION | |||||
|---|---|---|---|---|---|
| Asset | Risk-averse | Conservative | Balanced | Growth | Aggresive |
| Equity | 0% | 20% | 50% | 70% | 90% |
| Debt | 70% | 70% | 35% | 15% | 5% |
| Gold | 30% | 10% | 15% | 15% | 5% |
| Total | 100% | 100% | 100% | 100% | 100% |
Gold
Gold has been a promising asset during uncertain times also delivering strong returns. The low-interest rates environment and a huge liquidity infusion in the economy further supported this rally.
"In 2020, Gold delivered 28 percent returns in rupee terms and 25 percent returns in US dollar terms. However, gold prices have been in the corrective mode since November 2020 on account of 1) ‘Risk on’ trade in the global market, 2) Equity Market hitting an all-time high, 3) More risk appetite towards riskier assets, especially the emerging market, and 4) Positive vaccine development," noted the brokerage.
Further, as overall investor sentiment improved in 2021 on vaccine drive and faster-than-expected economic recovery, it manifested in higher betting on riskier assets such as equity, thus keeping the gold prices under pressure. Gold stood the biggest underperformer in the last one year and has declined by 1.5 percent over the same period.
However, Gold will continue to be a preferred asset class until the uncertainties over the economic recovery completely fade and will continue to attract investments as a proven hedge against other asset classes.
"Gold prices will continue to find support from the geopolitical risk and the inflation pressure in the global environment. We continue our Neutral stance on Gold and recommend a ‘Buy-on-Dips’ strategy," stated the brokerage.
Currency
READ: How do rupee appreciation and depreciation affect stock markets?
The Indian currency has continued to remain weak on the back of a strong dollar and massive foreign outflows. As per Axis Securities, key events deciding the currency market direction moving forward include 1) Spread of the new variant and its economic impact; 2) Bond yield direction as the FED signals first rate hike as soon as March; 3) Trend in the US inflation, 4) Direction of the Oil prices, and 5) Direction of Indian long-term bond yields.
