Experts believe that the equity market will remain volatile as long as the Central Bank including the US Fed considers the most necessary measures to control inflation through increased interest rates.
Best Investment Strategy in Current Scenario: In today’s time inflation has become a big problem. Inflation rates in all major economies of the world are at a decade high. However, it remains to be seen how the economies react to this. Meanwhile, the central banks are showing strictness regarding the monetary policy and the rate hike cycle has started. Experts believe that the equity market will remain volatile as long as the US Fed believes that controlling inflation through increased interest rates is the most important measure. After all, what kind of strategy can be better for investing in such an environment. About this S Naren, ED & CIO, ICICI Prudential AMC has given his opinion.
S Naren says that in the meantime, the Reserve Bank (RBI) is also looking proactive on its approach to control inflation at the domestic level with a hike in interest rates. We believe that there is full scope for a hike in interest rates in the short term. Increased interest rates coupled with rise in commodity prices may impact Corporate India in general. Its initial indications were shown in the results of the companies for the March quarter. Where there was pressure on the margins of companies due to increase in input cost. In some sectors, companies have increased the prices of their products and put the burden on the consumer.
Some sectors will suffer, some will benefit
Maintaining the balance between growth and profitability is a tough task. Hence, we believe that there will be some segments which will be affected by the hike in interest rates and higher commodity prices and may see a decline in their earnings in the coming quarters. On the other hand, commodity oriented companies are expected to benefit and companies operating in these segments can expect earnings.
Moderation in valuations, but risk factors exist
After the recent fall in the market, there has been some moderation in the valuation. However, there is still uncertainty ahead and volatility in the market cannot be ruled out. The reasons for the volatility in the market going forward, the major factors are rising crude oil prices, aggressive monetary policy and increase in interest rates by global central banks, supply side disruptions and geopolitical tensions due to Russia-Ukraine war.
Market will keep an eye on retail investors
Apart from this, the market will also keep an eye on the inflow of domestic investors i.e. DII. Over the past few months, DII has worked to effectively balance the continuous selling by FIIs in Indian equities. In the month of April, when FIIs sold Rs 20,468 crore, DII bought equity worth Rs 22,371 crore. In May, FIIs pulled out Rs 37,663 crore from the market, while DIIs bought equity worth Rs 27,360 crore. If the volatility in the market increases further, it remains to be seen how the retail investors will react.
Asset Allocation Strategy Better Choice
No one can predict how global economies will react to the tough measures. Hence, asset allocation strategy may be the best option for the investors for now. However, they have to make an investment strategy at their discretion and looking at their risk profile. For an investor, it is necessary to invest in different asset classes like Equity, Debt, Gold. This can be achieved through asset allocation or by investing in multi asset schemes. Multi asset schemes invest in different asset classes.
If SIP is running then continue
Investors whose SIP is going on, they should continue it and should not get affected by any short term development in the market. We believe that investors who neglect risk management in the mid term can be in for a negative investment experience. Going forward, after a couple of hikes in rates, there is a possibility that the environment is conducive to risk taking.
Investing in Export Oriented Sectors
Export-oriented companies are more likely to benefit from the weakening of the rupee. Therefore, investors can consider funds that are focused on exports and services. Because rising cost inflation has less impact on them, while depreciating currency also benefits. Another interesting category is the dividend yield. Presently, corporate balance sheets are in very good shape and total leverage, especially in mid and small cap companies, is at a decade low. Hence, the dividend payout looks sustainable at a time when the market may remain uncertain going forward.
Floating rate category funds are a better option
Talking about debt, we believe that investors should invest in floating rate category funds. This is because the nature of floating rate securities is to adjust to rising interest rates and coupons. Furthermore, floating rate bonds have a positive correlation with rising interest rates and hence the return on floating rate bonds is positively correlated with rising interest rates.
Mid and small cap may fall
In terms of market capitalization, there has been a significant correction in the mid and small cap segment in the recent past. There is scope for further downside in the market due to volatility. Therefore, investors who are thinking of investing in mid and small caps, postpone it for some time.