scorecardresearchEquity portfolio needs to have a prudent mix of both growth and value stocks, says Motilal Oswal Private Wealth

Equity portfolio needs to have a prudent mix of both growth and value stocks, says Motilal Oswal Private Wealth

Updated: 09 Jan 2023, 02:34 PM IST
TL;DR.
The trend of healthy corporate earnings growth over the last couple of years is likely to continue over the course of the decade and should cushion equity market valuations in India.
Unlike the US, India does not face similar concerns on inflation.

Unlike the US, India does not face similar concerns on inflation.

Financial firm Motilal Oswal Private Wealth (MOPW) is of the view that amid changing economic and financial market situations, a combination of growth and value stocks could be an ideal investment strategy.

In its flagship report "Alpha Strategist", MOPW highlighted that the global economies and financial markets are experiencing winds of change. This infers that the new economic fundamentals are becoming predominant, which will dramatically alter the growth trends witnessed over the last 10 years.

The Alpha Strategist report encapsulates the performance analogies of various asset classes during 2013-22 and provides an advisory on the ideal asset mix for wealth creation.

As per it, the corporate debt-to-equity ratio has significantly reduced to 0.6 times over the last six years, and bank balance sheets have improved indicating that the Indian economy is expected to move to a $5-6 trillion economy this decade.

The trend of healthy corporate earnings growth over the last couple of years is likely to continue over the course of the decade and should cushion equity market valuations in India, said MOPW.

US S&P 500: Lead performer with a CAGR of 15% in the decade of 2013-22

MOPW highlighted that the decade of 2013-22 belonged to US equities (S&P500) followed by Indian equities (Nifty50) and developed markets (MSCI DM).

"US equities (S&P500) have given staggering returns of 15 percent CAGR for a period of the last 10 years, which is much higher when compared with the Nifty 50 and MSCI DM of 11.9 percent and 11.4 percent, respectively," it said.

"This showcases that US equities returns have outperformed Indian equities by nearly 310 basis points CAGR over the last 10 years. Other asset classes namely MSCI EM - MSCI Emerging Index INR, Gold - Gold INR, Debt - CRISIL Composite Bond Index, Liquid - CRISIL Liquid Index, and Real Estate - RBI House Price Index have given returns in the range of 6 percent to 8 percent CAGR," the financial firm added.

Sharing inferences from the perspective of the year 2022, the Alpha Strategist report highlighted that gold was the lead performer as an asset class providing returns of 13.9 percent. Liquid Index offered returns of 5.1 percent which is better than returns offered by Nifty 50 of 4.3 percent.

The outperformer of 2013-22, US equities gave negative returns of 10.7 percent in 2022. "This is a testament to winds of change where a series of events in CY22 is causing a change in trend, rather intensely," said MOPW.

MOPW further said that the conflict in Ukraine and subsequent sanctions on Russia led to major disruptions in global supply chains along with a surge in fuel and commodity prices, thereby proliferating inflation. In a combative bid, the US Fed, along with global central banks, has resorted to hiking interest rates at the fastest pace ever historically. Higher cost of capital has led to the de-rating of equity market valuations.

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Performance of different asset classes in the last decade.

"With the rise in interest rates, fixed income becomes a very important asset class, and should form part of the portfolio irrespective of risk profile,' said Ashish Shanker, MD & CEO, Motilal Oswal Private Wealth.

Shanker added that, unlike the US, India does not face similar concerns on inflation, hence interest rates are likely to peak out soon domestically. The yield curve in India has flattened out with the one-year to 10-year G-sec yields trading in a narrow band of 6.75-7.35 percent.

"We advise core allocation to the four-five year maturity segment through high credit quality, Target Maturity Funds which invest in a combination of G-sec, State Development Loans (SDL), and AAA-rated instruments. Tactical allocation to select high-yield private credit strategies, MLDs, REITs, and InvITs can help enhance the yield on fixed-income portfolios. Gold should be treated predominantly as a hedge against heightened volatility,” said Shanker.

Shanker highlighted while the last decade belonged to growth (earnings momentum and quality), the value style, which typically includes cyclical sectors like financials, capital goods, power, and real estate, underperformed.

"There is a likelihood that some of these cyclical sectors could do much better going forward relative to the last decade. However, we recommend an equity portfolio needs to have a judicious mix of both investment styles – growth and value," said Shanker.

Amidst this global chaos, India is experiencing winds of change that bode well for the economy and the equity market.

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Market cycle

Investors made good returns by chasing the momentum stocks

Momentum stocks gave strong returns of over 19.9 percent CAGR which is much higher than returns given by quality and low-volatility stocks of 16.3 percent and 15.8 percent over the last decade.

"This indicates that the last decade belonged to investors chasing momentum stocks. Nifty200 gave returns of 13.6 percent while value stocks gave the lowest return of 10.3 percent in the past 10 years," said MOPW.

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Momentum stocks gave good returns in the last decade.

Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.

 

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First Published: 09 Jan 2023, 02:34 PM IST