Investors need to follow 'The Way of Samurai' to maintain discipline to an Investment Charter, Asset Allocation & deployment strategy : Motilal Oswal Private Wealth
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According to Alpha Strategist August 2024 report by Motilal Oswal Private Wealth (MOPW), The recent rate hike by Bank of Japan & US economic data has led to heightened volatility in risk assets. It is during such times that investors need to follow ‘The Way of Samurai’ namely to maintain discipline to an Investment Charter, Asset Allocation and deployment strategy which is essential for long term wealth creation.
A 'carry trade' occurs when investors borrow money in a country where interest rates are extremely low and invest that money, after converting the currency, in a country where interest rates are relatively much higher. To combat deflation, the Bank of Japan (BoJ) kept the country's interest rate at zero for almost a decade. This influenced global investors to borrow in Japanese Yen and invest in risk assets like equity denominated in USD and other global currencies, hence the term – Yen Carry Trade. With inflation rising, the BoJ recently hiked rates to 0.25%, which led to some unwinding of the yen carry trade causing high volatility in global equity markets. Couple this with recent data from the US which indicates slowdown in the labour market, fuelling concerns of a recession. Market participants now expect the US Fed to commence cutting interest rates from Sep'24 onwards.
Despite these global events, India continues to remain a bright spot and is expected to be the fastest growing major economy this year. Corporate earnings growth over the last five years has been stellar and this has been the primary driver of equity market performance. For the top 500 listed companies, (Nifty500), the PAT growth between FY19-24 was 22%, and the total market cap of these companies has grown at the same rate during this period. Earnings growth is expected to moderate going forward.
In terms of valuations using Price to Earnings (PE), Large Caps are in fair valuation while Mid & Small caps on aggregate are relatively expensive. MOPW suggests adopting a staggered investment approach over 6 months for Large cap & Multicap strategies. For select Mid & Small cap strategies, investments should be staggered over the next 6-12 months.
In the Fixed Income market, on the back of favourable demand-supply dynamics and well contained inflation, the yield curve has started to gradually steepen, i.e. debt securities with 1-3 year maturity are trading at yields which are lower than those with 10 year & above maturity. The RBI is likely to maintain status quo on interest rates this year with an eye on the US Fed rate actions.
The recent Budget provided a fillip to Multi Asset Allocation funds, which invest in equity, debt and gold, and should be considered as a superior alternative to traditional fixed income. For incremental investments in fixed income portfolios, MOPW suggests that 30% should be invested in actively & passively managed duration funds, 30-35% should be allocated to conservative Multi Asset Allocation funds, and 30-35% can be invested in a combination of Private Credit strategies, REITs, InVITs and select high yield NCDs
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Equity Strategy
The markets reach new highs & the budget further bolsters India's strong macro-micro positioning amid a fragile world economy. The combination of 7% GDP growth and ~15% Nifty earnings CAGR in FY24-26, stable currency, moderating inflation, and buoyant retail participation may keep sentiments strong. However, valuations appear fair for Nifty-50 and expensive for mid/small caps. Valuations for Nifty remain near its LPA at 21x one-year forward earnings. Industrials and Capex, Consumer Discretionary & Real Estate would continue to be in focus. Based on their risk profile, investors which the appropriate level of equity allocation can continue to remain invested. If equity allocation is lower than desired levels, investors can increase allocation by implementing a staggered investment strategy over 6 months for large & multi-cap strategies and 6 to 12 months for select mid & small-cap strategies with accelerated deployment in the event of a meaningful correction
Fixed Income Portfolio Strategy
MOPW reiterates their view to have a duration bias in the fixed income portfolio so as to capitalize on the likely softening of yields in the next 1-2 years
30% of the portfolio should be invested in
• Actively & Passively managed debt strategies to capitalize on duration
30% - 35% of the portfolio should be allocated to Multi Asset Allocation funds & Equity Savings Funds
• These funds aim to generate enhanced returns than traditional fixed income with moderate volatility through a combination of Domestic Equity, Arbitrage, Fixed income, International Equity, Gold & other Commodities
To improve the overall portfolio yield, 30% – 35% of the overall fixed income portfolio can be allocated to Private Credit strategies, REITs/InvITs & select high yield NCDs
For Liquidity Management, investments can be made in Floating Rate & Arbitrage Funds
Silver
Demand & Supply
In the last three years there has been a deficit (demand exceeding supply) for silver which supported the prices. The trend for industrial demand for silver is increasing since 2020 and has reached at all highs.
Outlook
As per MOFSL research, Silver has a strong demand outlook based on the following reasons:
• Industrial demand boost
• Boost in Manufacturing and Industrial activity in China
• Potential for pickup in Green tech
Gold
Gold is an important asset class during times of heightened volatility and should be considered for strategic portfolio allocation.
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