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Financial Market Round-Up – Apr’23




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Equity Market Insights:

The last quarter has seen one of the major shakeups from the prevailing easy situation over the last decade for the global economies. After one of the fastest increases in interest rates in history by all the major Central Banks in a matter of 12 months to contain inflation, the cracks have started showing in the form of bank collapses in the USA (SVB and Signature) and Europe (Credit Suisse). Thankfully, the Governments intervened to avoid major spillover effects on the overall economy.

The rising risk of Global financial uncertainties affected Indian markets as well. The Adani saga also aggravated volatility. Sensex declined by 4% over the Jan-Mar quarter. Major casualties were energy (down 16%), realty (down 11%), and metal (down 11%) sectors which have a high correlation with the performance of global economies. Higher valuation of Indian markets compared to Global peers along with negligible earnings growth also didn’t help.

As of 31st March 2023

Looking forward, we believe the
heightened global uncertainties, and unsupportive valuations in light of
slowing earnings growth in the US and Indian markets may induce more volatility
and hence more opportunities for long term investors. One should not be
over-allocated to equity (check the 3rd page for asset allocation) at the
current levels and any exposure should primarily be towards large cap-oriented
value portfolios against growth stocks. This approach has delivered
outperforming results for our clients over the last 1.5 years (Oct 2021-Mar
2023) when the benchmark indices produced negligible returns.

We have also been inclined to take 5-10% portfolio exposure in Asian stocks (China, Singapore, Taiwan, etc.) to take advantage of historically low valuations, expected continued growing global dominance in the long term, and for diversification purposes.

Debt Market Insights:

The debt yields remained elevated during the quarter on the back of rate hikes by Global Central Banks (50 bps to 4.75-5%) and by RBI (25 bps to 6.5%). Globally the debt market yields corrected a bit owing to the expectation of the end of the rate hike cycle and early reversal of the same by the Fed. The markets have built this expectation on the back of issues pertaining to banks and slowing inflation.

We believe, even if the interest rates
hikes are paused for now, the reversal may take some time. US Fed has clearly
indicated that they will be data dependent. They are far away from their target
inflation of 2%, way below the March inflation figure of 6%. It’s a known fact
that the outcome of hikes in interest rates appears with a lag effect. As of
now, it’s very hard to say whether the impact will result in a soft landing or
a full-blown Global recession. Whatever the case, India is closely intertwined
with Global economies and will also be affected by Global issues.

Another major development was related to
changes in taxation for debt mutual funds. Read about it in our personal
finance capsule on the 4th page.

We have been allocating debt to short duration or floating rate portfolios over the last 2 years on the expected rise in interest rates. We still prefer a portfolio duration of around 1-1.5 years with preferably floating rate instruments owing to volatility in the interest rate scenarios while keeping in mind the low likelihood of a 50-75 bps increase in yields from here.

 Other Asset Classes:

Staying on course with our expectations,
Gold was the hero asset class over the last year delivering 15% returns in FY23
and 8% in Q4FY23. We have been allocating 10-20% Gold from around INR 30-35K
levels in all our clients’ portfolios on the back of excessive money printing,
global uncertainties, and fear of rising inflation. Although money printing is
reversing & inflation is declining (although at a slower pace than
expected), Global uncertainties are still high owing to attempts at the
de-dollarization of Global economies led by China. After the US Government’s
use of the dollar as a weapon against Russia and unaccounted printing of
US dollars that increases the inflation risk for the rest of the world, there
has been a shift of policies regarding the management of forex reserves by many
countries resulting in increasing allocation to Gold.

The rise in Gold prices also somewhat negated the impact of the decline in the equity portion of our client’s portfolio. We continue to recommend 10-20% of gold exposure in all the portfolios depending upon the risk profile as insurance against global uncertainties.

For the last 1.5 years, our broad understanding (click here to read) was:

•Equity markets will underperform owing to pricey valuations •

•Interest rates will rise

•Gold could be a good portfolio hedge

Positioning our client portfolios based on these expectations allowed us to yield positive returns, which neither benchmark indices nor longer-term debt funds could.

TRUEMIND’S MODEL PORTFOLIO – CURRENT ASSET ALLOCATION

Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.



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