Markets witnessed significant volatility in June on the back of continuing macro risks of the Russia-Ukraine war, monetary tightening and rising inflation, fueling uncertainty. Amid these uncertain times, brokerage house Motilal Oswal Private Wealth (MOPW) said that it is biased towards multicap and select mid and small-cap strategies across MF/PMS/AIF platforms.
The brokerage noted that the equity market is in the fair zone and close to the cheap valuation zone. For incremental investments, MOPW continues to suggest 50 percent deployment immediately and 50 percent to be staggered over 3-6 months while being able to accelerate deployment during sharp corrections.
It also advised investors to invest 70- 80 percent of their portfolio in high-quality (G-Sec/SDL/AAA equivalent) accrual strategies through a combination of short-term and medium-term maturity portfolios (currently not beyond 2027 maturity) with a minimum investment horizon of 3 years.
As per MOPW, in debt, a high-quality accrual strategy would have lower volatility as compared to a dynamic strategy while generating a similar average return over a 1 year holding period. While in equity, a large-cap strategy has historically exhibited relatively lower volatility and generated lower returns as compared to the small-cap strategy. Thereby, one has to carefully examine if a particular investment strategy is aligned with their risk appetite before making an investment decision, it noted.
Smallcap mutual fund schemes have given the highest average returns (26 percent) in a 1-year rolling period followed by Midcap schemes at 22 percent and multicap schemes at 21 percent, pointed out the brokerage. Average returns for largecap schemes stand at around 17 percent, the lowest in the lot, it added.
Going ahead, the brokerage anticipates higher than usual volatility in the short term. From a domestic perspective while the direct impact of the Russian-Ukraine conflict, through trade channels may be limited, the indirect impact on Crude prices, Inflation, and rising raw material prices need to be monitored, it added. However, in the interim, still accommodative policy settings, tight labour markets, and a transition to endemic Covid should support global growth and limit the risks of a significant downturn, said MOPW.
It also noted that margins can come under pressure, particularly in consumer-facing companies and pricing power is likely to be a key driver of relative equity performance moving forward. After years of ultra-accommodative monetary policy creating a rising tide that floated all boats, the current era is one in which investors need to be selective and discerning, focusing on industries and companies that can potentially perform well in this environment, the brokerage pointed out.
"To enhance the overall portfolio yield, investors with a medium to high-risk profile can consider 20– 25 percent allocation of the overall fixed-income portfolio to select high yield strategies, MLDs and NCDs. Fixed
Income portfolios should also include REITs/InvITs which have the highest credit rating and which aim to offer regular (either quarterly or half-yearly) and predictable cash flows - investment horizon should be at least 4-5 years to mitigate interim mark to market volatility," the brokerage recommended.
Notwithstanding the short-term global risks and assuming that the geopolitical tensions are diffused soon, the brokerage remains optimistic about a reasonable domestic recovery. Key drivers include relaxation of COVID-led restrictions which may potentially spur demand, anticipated revival in investment cycle and domestic manufacturing, it added.