Indian markets continued its rally during the month, a sharp recovery from mid-June lows. Amidst all the volatility of last 6 months, Nifty & Midcap indices have reached a level higher vis-a-vis where they were at the time when Russia-Ukraine war started. There is a real tug of war between the “bottom up” idea called Indian economy with strong long-term growth outlook on one side vis-a-vis global macro concerns in short-term (war, inflation, Fed policy etc). This re-emphasizes the power of SIP as a strategy where one can buy every dip, creating sustainable wealth in Indian economy’s growth journey from 7th largest economy to 3rd largest economy in this decade.

While there are no visible signs of any change in macro concerns, an incremental negative has been reports of worsening economic outlook in China. This is likely to make Indian economy better for equity investors vis-a-vis China. We saw an early sign of this in August with inflows of over USD 6 billion, after an outflow of over USD 33 billion in previous 9-10 months. It may be early to conclude on the basis of August FPI flows as trends change, but the big picture remains that the sentiments are weak towards equity assets globally as a response to US Fed’s action on liquidity. However, India’s fundamentals remain silver lining in the global economy.

Indian markets rallied with midcap indices leading, followed by smallcap and Nifty indices in that order. Sector-wise, Metals, Energy, Commodities, Financials and Auto outperformed while IT, Pharma & Media underperformed Nifty. Global markets were negative with US Indices down around ~4%.

Indian economy grew by 13.5% for Q1FY23. The growth was led by services sector: Construction (16.8%), Trade-Hotel-Transport (25.7%) and public administration-defence, etc (26.3%). On the other hand, agriculture (4.5%), manufacturing (4.8%) and mining (6.5%) trailed the overall growth rate. The 13.5% growth is below the expectations of both market as well as RBI. Post this, RBI’s estimate of 7.2% growth for FY23 looks challenging and we await any formal downgrade of expectations by RBI. Monsoon season has been a bit weaker than expected especially, when looking at the regional disparities. There could be some shortfall in crop production vis-a-vis the estimates.

Indian economy is on an overall good path with fiscal stability (growth, rising tax collections, disciplined spending, formal & digital economy). There is some pressure on the current account front (high energy prices, concerns over exports & capital flows in a weakening global economy). Historically, a higher current account deficit in India gets adjusted in economy vis-a-vis a weaker rupee and this could be a likely outcome if the deficit persists. The additional comfort comes from stable banking system (well-capitalized for credit growth with a stable asset quality), PLI focus and healthy corporate earnings.

Globally, the key message from US Fed Chief Jerome Powell’s commentary at Jackson Hole was for a “higher for longer” policy on interest rate and quantitative tightening. This was a surprise to market participants as the key reason for global rally in past 2 months had been expectations of US Fed reversing its stance amidst recession fears. “Bad economic data being good for markets” may not play out considering US Fed’s stated position as on date. We believe US Fed’s action are likely to have direct implications on risk appetite and valuations and hence a good strategy for investors is to focus on asset allocation. SIP remains preferred way to increase equity allocation using market volatility.

Indian economy remains on a growth path leading the world economic growth ranking. From highs of 13.5% in Q1FY23, GDP growth is likely to moderate to around 4.5%-5% over next 3-4 quarters. The results in Q1FY23 have been reasonably in-line with expectations, however, the outlook commentary has led to some downgrades for FY23. Amidst the uncertainties, our investment approach remains focussed on selecting companies; with near-term earnings growth, positioned as market leaders in their respective industries, with low leverage on balance-sheets and pricing power.

Asset allocation to equities creates wealth over long term as growth rewards equity assets. Growth outlook turns volatile at various times due to multiple factors. History has shown that equity assets acquired during volatile times deliver better returns over longer term. We recommend

• 1. Conservative investors may continue to use systematic investment route and avoid the market timing worries.
  2. Aggressive investors may attempt market timing via lumpsum investments.
  3. Balance investors may use “Balanced Advantage route”. This allows fund managers the flexibility of shifting asset allocation and time the market during volatility

• Our view is that volatility may continue and SIP may be a good way to increase equity market allocations.
• Investors looking to invest for a medium to long period, can consider SIPs or STPs into focused, multicap or hybrid funds based on risk appetite.
• Investors looking for a better return opportunity and with a suitable risk appetite, may consider part allocation in mid cap fund as well.

• While we continue to remain apprehensive of a rate rise on the shorter-end of the curve as we move through the year, we believe the first half of the current financial year may mark the terminal value of the rate rise phenomenon. With commodity prices, barring crude, softening through the past 3-months; we believe a sustained commodity slowdown will provide a respite to the retail inflation.
• The possibility of a bear flattening of the yield curve especially in the 1-year-5year segment remains high with the start of the rate hike cycle.
• We also believe that AAA credit spreads are very tight and the probability of spreads increasing in the near future remains a distinct possibility.
• Liquidity being gradually normalized; the extreme short-end of the yield curve may also remain under pressure.

• We believe that investors with a shorter-time horizon of less than one year may continue investments in ultra-short term and low duration funds.
• Short-term fund category may be suitable for investors looking to stay for a time horizon beyond one year with lower risk volatility.
• For a long investment horizon and with a suitable risk appetite, an allocation to Dynamic Bond fund merits attention.