Recession is a certainty in Europe, a possibility in the USA and unlikely in India, said Sandeep Bagla, Chief Executive Officer, TRUST Mutual Fund, in an interview with MintGenie.
“The volatility stems from uncertainty over future economic conditions, which I feel is likely to carry well into 2023. Return expectations should be subdued for 2023,” said Bagla.
In the interview, Bagla also shared investment strategy for 2023, tips for first-time investors, expectations from the upcoming Budget and more.
Q. Rising inflation rates, aggressive rate hikes, fear of recession and geopolitical tensions dampened market spirit in 2022. Do you think this volatility will subdue return expectations in 2023 too?
Answer: Volatility in markets will continue in 2023 as well. While central banks globally have raised rates to control inflation, they are withdrawing the excess liquidity at a fairly low pace. Fears of economic slowdown/recession will prevent the markets from going up, whereas excess liquidity will keep the markets from falling too much. Recession is a certainty in Europe, a possibility in the USA and unlikely in India. Inflation fears are yet to subside due to tight labour markets and threaten to spill over to the services sector. In India, equity earnings are getting downgraded, but the markets refuse to correct meaningfully. The volatility stems from uncertainty over future economic conditions, which I feel is likely to carry well into 2023. Return expectations should be subdued for 2023.
Q. Many fund houses have been launching target maturity funds to benefit from the rising interest rates. Assuming that interest rates are expected to peak in the coming months, is this a good time to invest in target maturity plans?
Answer: Target maturity funds are akin to lazy investing, likely to underperform other active strategies. Interest rates have moved up, and an investor today invests in, say, a target maturity fund of five years at seven percent. If interest rates were to rise to eight percent in the near future, the investor has missed the opportunity of investing at a higher yield. If interest rates go down to six percent, the investor would have generated superior returns in a long maturity fund of 10-year maturity.
Target maturity funds are sub-optimal investment options which provide the investor certainty of returns at the current rate. It is difficult to make predictions about interest rates in a global environment where central banks have pumped in a humongous amount of liquidity and are reluctant to withdraw it despite being rudely reminded of the old adage that money creates inflation.
Q. The Nifty is already below 18,200. Is it time for bottom fishing?
Answer: To fish near the bottom, a substantial fall in the markets is necessary, though not sufficient. At current levels of 18,100, Nifty is about 3.2 percent below its all-time high. Analysts are in the process of future Nifty earnings downwards amidst rising inflation, higher input costs and global headwinds. One could invest in equity markets at current levels, however, calling it bottom fishing would be quite a stretch.
Q. What are your expectations from the market in 2023?
Answer: 2023 could well be a year where returns from riskier asset classes like cryptocurrencies, NFTs, and equities could be low to negative. Rates will be high and liquidity will progressively tighten, and there could be a point after which the risky assets could throw in the towel. Fixed-income markets could generate good returns if monetary policy succeeds in bringing inflation down and keeping inflation expectations in check.
The expectation for 2023 is high returns from bonds and high volatility in equities.
Q. Please share your expectations on the budget.
Answer: The Budget has ceased to be a market-moving event as most of the changes in policies are announced and executed throughout the year. With the high tax collections, the government appears to be in a reasonably comfortable position. In case there is fiscal profligacy, markets could react negatively in the short term, but the possibility of such an event is fairly low.
Q. With the market shifting gears due to macro factors, would you advise an asset allocation to current mutual fund investors?
Answer: The advice to investors is to increase allocation to debt, which will result in higher regular income with the potential to generate some capital gains as well which will add to the returns. One could stay invested in equities, as long-term prospects of Indian companies remain strong, but there could be a further time/price correction in risky assets.
Q. What is your advice to new investors in the market?
Answer: New investors should invest in a disciplined and prudent manner, follow an asset allocation as per their risk appetite and take advice from an investment advisor or a qualified mutual fund distributor.