The US Fed paused rates after 10 straight hikes, and Anand Dalmia, co-founder and CBO at Fisdom believes that while the pause is in line with broader anticipation, the indication that the peak may be further ahead conflicts with the current pause.
In an interview with MintGenie, he stated that India remains a buy-on-dips market this year and suggested that an ideal portfolio at this point in time would be a multi-asset portfolio.
He also advised investors that allocation to gold remains strategic and should ideally be evergreen in the range of 10-15 percent of total assets. It is important for investors to acknowledge that successful investing is a journey and not a bet, he added.
Edited excerpts
Are you satisfied with the US Fed rate decision?
While the pause is in line with broader anticipation, the subtle hawkish undertone causes some concern. The dot plot seems to raise more questions than the pause could have answered. The subtle hawkishness is not as great a concern as the fact that it was bundled with a pause. It is indeed possible that the committee wishes to assess the actual extent of damage emanating from the regional banks' debacles, the sustainability of improving inflation and labour metrics and the actual impact of monetary tightening exercises.
However, the indication that the peak may be further ahead conflicts with the current pause. The conflict forces one to expect trouble to be lurking way behind comforting headline metrics. While the rate decision's alignment with expectations is appreciable, the overall statement leaves one with enough reason to remain cautious.
After a rough start to the year, Indian markets have recovered splendidly and have almost reached all-time high levels. Do you see this trend continuing for the remainder of the year or is it likely to remain volatile, like 2022?
Indian markets have indeed exhibited a smart recovery in recent months. Most such recovery is attributable to a fuller investment cycle, healthier corporate and banking balance sheets, improved earnings outlook and stronger national accounts. Though reported earnings so far and the outlook appears robust, the same is yet to be fully captured by prices. Though broader indices are climbing higher, valuations seem relatively reasonable for the same. Though some perspectives could peg valuations on the richer side versus the emerging markets pack or perhaps against longer-term averages, it is important to view such relative valuation metrics in the context of and while adjusting for growth expectations. Market cap to GDP has moderated from the previous peak while the uptick corporate earnings to GDP also supports the reasonable headline valuations position.
FPIs have turned around the corner towards the end of the previous fiscal and are buying with renewed enthusiasm; such a trend can be expected to sustain as the global risk-off eases and more global brokerages highlight the India opportunity. Risks to the outlook could emanate in the form of spillovers from global risks, a steep reversal in energy prices, and inflationary shocks domestically. Largely, India remains a buy-on-dips market this year.
With markets almost at peaks, what strategy should one follow?
Instead of calling it a peak, it may be better to refer to the indices as closer to their lifetime high. The peak is clearly further ahead of us. Principles of asset allocation and discipline matter the most especially at times like now. If an investor has designed an asset allocation framework in line with the risk and investment profile, a rebalancing to that effect should hold such an investor in good stead. For investors seeking to optimise market cycles in the shorter term, it may make sense to shore up fixed-income allocations.
Investors with an appropriate profile can also explore opportunities through plays on credit risk in the segment. Gold continues to warrant a strategic allocation in portfolios with the case strengthened further in the context of global inflationary and interest rate dynamics. Deploying fresh capital through the SIP or STP route could be especially beneficial for longer-term investors while running an STP from an arbitrage fund could take the efficiency a notch higher.
A multi-asset portfolio focused on optimising every asset class through focused plays should help investors make the most of the current cycle without succumbing to the risk of waiting for the cycle out.
Amid this scenario, which sectors should investors stay away from and why?
We expect the earnings expansion cycle to be a tide that will take almost all ships higher. While every sector stands to benefit through the broader expansionary cycle, there are some that will race ahead faster in the near term and many may take relatively longer to catch up with the outperformers. Indian IT is one such sector where we believe macroeconomic headwinds and adverse global developments will continue to weigh on investor sentiments for slightly longer than others.
However, on the flip side, though the shorter term could be challenging for the broader sector, one can also expect such stress to open up opportunities to buy high-quality stocks at relatively reasonable valuations. So, in the shorter term, one could be underweight in IT. Another sector that is secularly under stress, across the board, is aviation. Aviation is a sector where every operator is witnessing a distinct set of challenges along with the broader ones applicable across the sector. Investors could probably wait and watch for developments before making investment decisions related to the sector.
IPO activity has started recovering this year after a poor show last year. Do you see a strong number of IPOs launching this year or will the activity remain subdued?
The IPO pipeline is filling at a fast clip with more companies in the process of submitting proposals or awaiting feedback from the regulator. However, many are also holding back on a launch in anticipation of a healthier listing environment being further ahead of us. Elevated interest rates, spillover risks from global uncertainty and tepid performance of recently listed equities seem to be key causes of concern.
At the same time, there has been a notable increase in private placements indicating diversion of potential listing interest towards private markets. Overall, the IPO market can be expected to remain subdued in the near term while it continues to hold promise for a robust season sooner than later.
Large caps or midcaps? Which would you pick and why?
An investor's personalised asset allocation strategy should ideally carry the appropriate response to this. However, for investors attempting to optimise for risk and reward in the context of the prevailing market cycle, a well-allocated portfolio primarily oriented in favor largecaps would be preferred. Such allocation would help deliver a more efficient risk-reward payoff in the shorter term. Relative valuations in the small and midcap segments are turning favorable and investors with an appetite could start building allocation through a selective fund or stock selection practices.
What about other asset classes like gold, fixed-income assets, and real estate, what is your outlook for them for 2023?
We maintain that gold must continue to feature in portfolios as a strategic allocation across seasons. This is more from a portfolio risk optimisation standpoint. Central banks' aggressive gold-buying spree, expectations of a sooner-than-later reversal in the US interest rate regime, and the narrative of de-dollarisation work towards a brighter outlook for gold prices. Yields on the three to six-year maturity bucket appear favourable.
An improving credit environment with expectations of a fuller investment cycle augur well for investors with an appetite for credit risk. Minor allocations towards the longer end of the curve could offer fixed-income investors some tactical upside. The real estate segment is showing signs of revival and promise. However, the most efficient manner to take exposure to real estate would be through representative stocks and for select use cases, through REITs.
What trends can lead to a double-digit return for benchmarks in 2023?
The broader capex agenda is a key variable in the expected economic expansion narrative. While public capex commitments have been robust and implementations picking pace, incremental investments by the private segment could add strength to the growth trajectory. Contained inflation and an earlier rate reversal will propel the broader economy further into the expansionary phase. Recovery in rural demand is expected to aid further growth in aggregate consumption. Input prices continuing at lower levels, improving cost-efficiencies and uptick in the investment cycle will support margin expansion in key manufacturing segments. PLI and China plus one narrative are key tailwinds to manufacturing as well. With favourable macroeconomic developments and a robust earnings growth outlook, benchmark indices could exhibit robust growth, albeit through the medium term.
What constitutes your ideal portfolio in a record-high scenario?
An ideal portfolio at this point in time would be a multi-asset portfolio with allocations aligning with an investor's profile. The ideal way to approach such a portfolio would be by segregating it into core and satellite portfolios. Here, the core portfolio can be expected to comprise all-season asset classes and product categories.
The core would include a strategic allocation to equities, with a larger allocation to the same for an aggressive investor with a longer investment horizon. Allocation to gold remains strategic and should ideally be evergreen in the range of 10-15 percent of total assets. Fixed income allocation within the core portfolio would typically hold instruments of high credit quality and the intent to hold till maturity.
The satellite portfolio on the other hand is expected to optimise for the market cycle through equities and fixed income primarily. On the equity side, there could be incremental exposure to more cyclical and thematic bets like value or contra plays. For fixed income, here, allocation to credit opportunities and duration plays would be key allocations.
One piece of advice for new investors
New investors are often in a quest to identify the best security or the best financial product without limited focus on features, risk, and most importantly- suitability. It is important for investors to understand that no security or financial product could be the best bet for every portfolio, every investor, and every financial goal.
Investors must begin their investing journey by understanding their own profile which could include details on their financial goal, their ability to take on risk, their behavioral biases, and any personal inclinations or restrictions that could have an impact on their investment decisions.
Next, once investors identify securities or products that seem to fit right, it is imperative to understand them in as much depth as possible. This would include understanding the features and risks involved in such an investment. It may seem like a lot of work at first; but without it, the outcome is merely a subject matter of luck. It is important for investors to acknowledge that successful investing is a journey and not a bet.
