Strategy review
1HFY23 Market performance
For the Indian markets, the first half of the current financial year (1HFY23) has been noteworthy in many respects. While the benchmark indices have remained boringly range bound (not unexpectedly see here), the shift in sector preferences has been material. Also as expected volatility has remained low to moderate and market breadth has narrowed down.
Some key highlights of the market performance in 1HFY23 could be listed as below:
Equity Markets
· Benchmark Nifty lost 2.1%, sharply outperforming the peers from emerging as well as developed markets. For example, S&P500 (US) lost ~20% in this period; while STOXX600 (Euro Area) was down over 15%.
· The foreign flows were majorly negative in 5 out of 6 months. Overall foreign portfolio investors sold ~US$20bn worth of Indian equities. Most of this selling was absorbed by domestic institutions. However, on a net basis, institutions were sellers worth Rs100bn.
· There was a clear shift in sector preference of investors, in accordance with the institutional flows. The momentum massively shifted to domestic consumer demand from global growth. The IT sector was a major loser with NIFTY IT losing over 25% in 1HFY23; whereas FMCG (+22%) and Auto (20%) were major gainers.
· Commodities (-7%) also lost in line with the global trend; with metals losing over 10%.
· Banks also sharply outperformed with the benchmark Bank Nifty gaining over 6%. PSBs (+10%) did better than their private sector peers (+8%).
· The domestic growth trade did get massive support from investors with Nifty Gowth Sector 15 index gaining over 18%; however, Realty (-8.5%) and Infra (-1.2%) sectors ended lower as rate hikes accelerated.
· Conventional investment style outperformed with Nifty100 Quality (+1.6%) gaining and Nifty Alpha 50 (-16.6%) losing. Small caps lost close to 10% while midcap gained over 3%. Overall market breadth was neutral.
Currency & Debt Markets
· Bond yields in India rose sharply in line with the global trend. The benchmark 10yr Treasury bond yields rose 50bps from 6.9% at the end of March 2022 to over 7.4%.
· The yield curve flattened materially, with the short term yields lifting more than 50% from below 4% to over 6%.
· RBI has so far hiked the policy repo rates by 190bps in FY23.
· USDINR depreciated over 8% from 75.95 at the end of FY22 to 82.35 presently.
Outlook and Strategy
As I stated in my last strategy review (see here), the investment environment continues to be very uncertain and complex. The geopolitical uncertainties, fiscal policy fatigue and monetary policy dilemma makes short term forecasts very complex. These factors further support the idea of keeping the investment strategy simple and giving preference to capital preservation over higher returns.
Market outlook
The market movement in the 1HFY23 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 FY23. I expect-
(a) NIfty50 may move in a much larger range of 16200-18745 during 2HFY23.
(b) I shall remain positive on 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.
(d) USDINR may average close to INR78.5-79/USD in 2H2023. Better growth and stable markets may attract decent 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 continue to remain strong.
Investment strategy
I shall continue to maintain my standard allocation in 2HFY23 and avoid active trading in my equity portfolio. I am keeping my target return for the overall financial asset portfolio for FY23 to 7%.
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