2H2022 – Market outlook and investment strategy

In my past couple of strategy reviews, I had noted that given the present circumstances, the market outlook is pretty simple and straightforward – Moderate return expectations and focus on capital preservation. In fact, in the past three months the investment environment has become much more uncertain and complex. The geopolitical uncertainties, fiscal policy fatigue and monetary policy dilemma make short term forecasts very complex. These factors further support the idea of keeping the investment strategy simple and continue giving preference to capital preservation over higher returns.

I continue to believe that the economic and market cycles are now becoming much more shallow as compared to the 80s and 90s. The recessions nowadays last for a couple of quarters, not many years. Inflation peaks at 7-8%. Despite all the brouhaha over unprecedented QE and uncontrolled inflation, US rates are expected to peak at 3%. In fact the bond market in the US may already be pricing in a reversal of monetary policy and beginning of a rate cut cycle in 2023. In India also bond yields are expected to peak around 7.5% despite higher fiscal deficit and high inflation.

The market corrections (except the knee jerk reaction to pandemic led lock down) are also shallow and short lived. Unlike in the 1990s and early 2000s, we no longer see 20% plus correction in benchmark indices more frequently now.

The point is that defining market outlook and defining an investment strategy on the basis of that must factor in the new trend of shallow cycles. Relying on historical data of deep cycles may lead to unsatisfactory results.

Market outlook

The market movement in the first half of 2022 has been mostly on the expected lines. Despite the ongoing conflict between Russia and Ukraine, and elevated energy prices, I do not see any reason to change my market outlook for the rest of 2022. I expect-

(a)   NIfty 50 may move in a large range of 15200-18600 during 2022. It would be reasonable to expect 10% + 2% return for the year for diversified portfolios.

(b)   The outlook is positive for IT Services, Financial Services, select capital goods, healthcare and consumer staples, and negative for commodities, chemicals, energy and discretionary consumption. For most other sectors the outlook is neutral.

(c)    Benchmark bond yields may average 7.25% + 30bps for the year. Longer duration may do better in 2H2022.

(d)   USDINR may average close to INR77/USD in 2H2022. Higher yields may attract flows to support INR.

(e)    Residential real estate prices may show a divergent trend in various geographies, but may generally remain stable. Commercial real estate may remain best category

Investment strategy

I shall continue to maintain my standard allocation in 2022 and avoid active trading in my equity portfolio. I am further downgrading my target return for the overall financial asset portfolio for 2022 to 7%.

Equity investment strategy

I would continue to focus on a mix of large and midcap stocks. The criteria for large cap stocks would be growth in earnings; while for midcaps it will be a mix of solvency & profitability ratios and operating leverage.

Debt strategy

I will continue to focus on accrual strategy for my debt portfolio. In case the yields spike beyond 7.75% due to policy rate hikes by RBI, I would lock-in my mid-term funds (3 to 5yrs) in long duration bonds/funds.