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Steering through Turbulence : Which direction is India heading through ?

Dear Reader,

A lot of you can be wondering what’s going on in the markets today. One day, you see the Nifty going up by a few percentage points, and the next day you see it tank like never before. And due to this, investors around the world are in a confused state of mind, as to what the investment strategy should be for 2023. Do I invest in heavily in equities now, on expectations of a recession and buying high-value stocks at a cheap price? Or do I invest in Cash/Debt and invest it at a later time when markets are “okay” again? And a whole lot more.

Well, today we try and debunk events that are happening globally and co-relate them to an investment outlook that is reasonable, probable, and most importantly, data-backed.

Firstly, Here’s a gist of what’s happening with economies around the globe...

Europe & the U.K. are currently going through a massive energy crisis, with supplies of Russian gas—critical for heating, industrial processes, and power—being cut by more than 80 percent this year. Wholesale prices of electricity and gas have surged as much as 15-fold since early 2021, with severe effects on households and businesses

  1. China dealing with its zero Covid Policy and a sustained 40 Yr high Inflation along with a massive property crisis the industry is in a slump & major developers have defaulted on their debts and the government is trying to organize a bailout. If you remember, this all started about a year back with Evergrande, one of China’s largest real estate companies defaulting on debt repayment, with loans of around $300bn.

  1. In the U.S. The S&P 500 fell nearly 25% in the first half of the year, plunging stocks into a deep bear market. This was primarily fuelled by all-time high inflation rates, due to which there was a pullback by the Fed with a massive 75 basis point hike and add to this, the chip war with China to tackle the issue of chip shortages.

Despite all global turbulences and headwinds, the Indian economy has been growing steadily and more so resiliently as compared to the rest of the leading economies.

Looking back, the Indian Govt. took some good measures which have helped us reach this stage…

The G7 spent around US $ 5 trillion as a stimulus package by direct infusion of cash into the economy. Where the U.S. spent around 27% of its GDP on stimulus, while the U.K. around 18%. So a rise in inflation was foreseen, but what made it worse was the unforeseeable war between Russia and Ukraine thus creating supply chain constraints globally and inflating prices even further

What did India do? Well, we spent around 3.5% of our GDP as part of the stimulus. The question is - was it sufficient? Probably not. But instead of a direct infusion of money, India focused on supporting the economy through growth incentives, liquidity, and food subsidies.

And after 2 years it did work in our favor where our inflation levels are pretty low compared to most Developed and developing economies.

Another factor that helped India immensely is its Energy Policy: After the Russian invasion of Ukraine, most countries neglected the Russian supply. This vastly increased the demand for oil across the globe. At such an occurrence, India bought oil from Russia at a massive 30% discount. And this certainly helped India in bracing itself, compared to the west.

Now moving ahead, the only thing that will protect India is if it can decouple from the global economy. But can India do so? The Indian economy already has decoupled to a great extent from the global economy than we think, given its large domestic demand. Though India is a net importer of energy, the country holds enough forex reserves on one hand which have grown from USD 293.9B in Sept. 2012 to USD 537.5B in Sept’22 ( 4th largest Reserve in the world).

So what are we really looking at moving forward and how do we, as investors guard ourselves against it?

Although India has decoupled to a large extent, this does not make us immune to global market headwinds. Globally a recession is expected to haunt most countries, but in India, although we may feel the heat of it, it is unlikely that we’ll face any long-lasting effects, let alone anything similar to the 2020 covid crash. It should be noted that markets could face drastic volatility over the next 6-8 months and hence, our strategies are designed keeping this in mind for the foreseeable future. On a broader scale, Indian Market Valuations, although not the cheapest, but are currently in a rationalized zone, especially considering the volatility in global indices including Nasdaq (U.S), FSTE (U.K) & SZSE (China)

So where should you invest?

  1. Well, if you’re someone who’s not comfortable with taking on too much risk but would still like some equities: Large Caps could be looked at more from a perspective of mitigating/averaging volatility in your portfolio if you have exposure to more aggressive strategies. The room to create alpha remains limited for the foreseeable future in large caps

  2. But if you’re comfortable with taking on more risk and withstanding volatility in the portfolio in the short term: Mid & Small Caps work well. Valuations have come down from their highest at 34.41 in Dec’17 to 22.6 in Nov’22 - due to lower earnings generated but Private and Public Capex, in all probability, will boost earnings over the next decade, potentially turning some of these small caps in mids and mids into large-cap businesses.

  3. Don’t want to take risks at all? Well, Debt instruments yielding 7-8% p.a work best with a particular focus on credit accrual and medium-duration strategies where the maturity of the portfolio lies between 3-5 years. This along with some exposure to Debt oriented Hybrid strategies should help deliver optimal returns while keeping the overall risk-return relatively low. Make sure to invest in AA & AAA papers with a good credit history to avoid any downsides.

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*Disclaimer: Views expressed are for informational purposes only and do not constitute any Financial Advice whatsoever. Please consult a financial advisor and read offer documents carefully before investing.

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