With indications of a global recession becoming stronger, now is a good time for investors to look at asset allocation strategies to maximise investment returns amid a fragile macroeconomic environment characterised by high interest rates and muted investor confidence, said key investment strategists and experts from Quantum AMC and Anand Rathi Wealth.
However, amid the general gloom, India might be in a relatively resilient position to weather the oncoming economic storm, adds the experts. Weighing in on the India asset class outlook and the best asset allocation strategies as well as the general macroeconomic trends leading into 2023 were Feroze Azeez, deputy chief executive officer (CEO), Anand Rathi Wealth and Chirag Mehta, chief investment officer (CIO), Quantum AMC, who were speaking to Miloni Bhatt, Digital Broadcast Editor of EconomicTimes.com.
Investment Outlook 2023
As we enter the new year, it is important for all investors, new and seasoned, to have an understanding of the market trends to expect for the year ahead and the investment lessons to be learned from the previous year.To help investors understand how the market performed in 2022 – who were the winners and the losers, how the global macros impacted the Indian markets, the investment strategies that worked – and the top investment trends and economic and market landscape to expect in 2023, we bring together experts in the field for this especially curated session to share their outlook for the market for 2023 and unpack the investing lessons from 2022. The session will also break down important investment strategies that investors should be aware of, including the right asset allocation mix for investors of different risk appetite amidst a tough market environment and growing geopolitical unrest.
Multi-asset allocation strategy
Mehta pointed out the importance of opting for an active multi-asset allocation strategy in 2023, citing the investment trends of 2022 as a perfect example for why investors should go in for such an investment strategy. He elaborated on how traditional asset mixes comprising equity and debt gave muted returns in 2022 as both these asset classes were adversely affected by the broader macroeconomic conditions. However, a multi-asset allocation strategy, comprising more than two asset classes, would have proved effective in such a scenario, Mehta said.
The year 2022 witnessed major changes in the major macro indicators. Broadly speaking, inflation became a sore point, and in a bid to fight it the central bank tightened the monetary policy, raising interest rates and hampering liquidity.
Value-based investing approach
Mehta analysed how among equities, blue chip companies have outperformed the general market, having dealt with major policy shocks such as demonetisation, implementation of the goods and services tax (GST) and the devastating COVID-19 pandemic that wreaked havoc on mid- and small-cap sectors; a trend which seems to be continuing in the short to medium term. Investors will do well to have a more value-based approach to investing rather than purely focusing on growth, said the CIO of asset management firm Quantum AMC. He reiterated that multi-class asset allocation strategies also pay better dividends when compared to single asset allocation strategies.
Keeping these broad themes in mind, there are indicators that India might be a rare bright spot among major economies facing crippling recession prospects. Azeez of financial services firm Anand Rathi Wealth explained how the Indian economy outperformed the global economy by 300-400 basis points on average, and is also seeing capital inflows as compared to capital outflows when investors perceive macroeconomic risks. Coupled with a substantial increase in GST, direct and indirect tax collections, the Indian economy has more headroom to navigate the upcoming troubled economic scenario.
Investment objectives, risks, time horizons
It becomes critical then for investors to optimise their asset allocation strategy to generate excess market returns or alpha in a volatile market ecosystem. Both Mehta and Azeez outlined broad pointers about possible asset mixes. Azeez explained how most investors fall into a tunnel-vision trap when it comes to assets, often exclusively focusing on a particular asset class, not realising that a particular asset class should be judged on specific investment objectives and not upon inherent biases that investors have. In general, Azeez advocated for a three-to-five-year investment horizon on equity investments to realise gains, with equity making up for 60-70% of one’s asset mix followed by debt at 20% and gold at 10%. As for investment vehicles, Azeez recommended taking the mutual fund route for equity investments and the sovereign gold bond route for the gold investments.
Mehta also stressed the inherent volatile nature of equities and how a longer investment horizon is key. Mehta stated how equities have given average annual returns of 14-15% over the last 40 years, with active management, which is 3-4% higher than the nominal gross domestic product (GDP) growth rate of 11-12% that the Indian economy achieved over the same period.
As for investment vehicles, Mehta opted for the pyramid structure of asset allocation where less risky assets form the base of the pyramid, while riskier assets make up the top level. Broadly, Mehta suggested stability-driven investment vehicles, which the investor understands. For instance, when it comes to debt investments, Mehta advised opting for government-issued fixed income securities such as treasury bills, which have lesser credit risk as compared to other debt instruments.
Investing in US equities
Azeez pointed out how this might also be the right time to invest in US equities as they are undervalued at the moment and the dollar value appreciation is attractive, with the dollar showing a continuous cycle of strengthening against the rupee, with the overarching focus being on diversification and not on chasing eye-popping returns by investing in high-risk assets like the highly volatile NASDAQ ETF (exchange traded fund). The critical thing to keep in mind is entering a bearish US equity market that is underperforming so that gains can be realised when the market corrects.
The role of Bharat investors
Both Azeez and Mehta agreed that the ‘Bharat’ investor or the average retail investor will play a critical role in the Indian capital markets going forward. As awareness about financial markets and products has exploded through dedicated investor education programmes, retail participation has also ballooned in tandem.
“So, that's why you see 10 years back, the systematic investment plan (SIP) number per month was about Rs 600 crores. Today, you see, it is Rs 13,600 crores, which is a massive increase. Of course, that's a very long period. Even if you see April this financial year, you are looking at Rs 11,900 increasing to Rs 13,600, and we predict the monthly SIP to further increase to Rs 25,000 crore”, said Azeez.
And the scope is enormous for the continued growth of the Indian equity markets fuelled by a burgeoning middle class. “So, overall, we think that we are just getting started with India as a whole and as an Indian investor owns just about 6-7% of Indian equities versus mature markets like the US with a 40-50% retail participation in their capital markets. So, we have a long way to go as India keeps growing in opportunities”, summed up Mehta.
(This article is generated and published by ET Spotlight team. You can get in touch with them on etspotlight@timesinternet.in)
