Market Outlook for 2023 is a very crucial topic to understand. World economies are dealing with multiple challenges and meanwhile markets are continuously reacting to recent developments on various fronts.
2023: Geopolitical Tensions | Recessionary Fears| Volatility Ahead | How would you tackle?
Disciplined investment approach will help generate superior returns across time horizons consistently. This statement carries more weight in volatile times. Last couple of years have been challenging on multiple fronts and this volatility is not ending in a hurry.
Today, allocation in risky assets is not favorable as reward is limited and room for risk is more open keeping the Geopolitical Tensions, Global Inflation and other issues under consideration. Hence, it’s wise to rebalance your asset allocation time to time keeping in mind the overall market situation.
What should be the asset allocation keeping your investment horizon and valuations of markets in mind?
One thing is pretty sure, that the rally in market that we had seen in 2020-2021 or the similar rally in 2014 or 2017, we are not expecting a much bigger upside in 2023 due to unfavorable risk reward scenario in Indian Equity Market and the following reasons:
- Global Inflationary factor which lead to consecutive rate hikes to curb inflation.
- Rising COVID cases in China and continuous lockdowns in China will lead to massive Supply Chain Disruption.
- Disturbance in China Real Estate Lobby shall have cascading effect on the Chinese Economy which will have repercussion across the globe.
- Russia and Ukraine War will continue to weight pressure on food supply.
- India’s structural story is good, but the valuations are still at record high. Hence, risk to reward ratio is unfavourable at these levels.
IMF has projected that World growth is slowing down, further Covid fears are also adding to corrective mood of the market. Hence, keeping money in equity is quite risky at this point of time.
Considering above factors, time has come to rebalance the portfolio (towards debt) keeping taxation and investment horizon under consideration.
The following questions need to be asked, when you are looking at your portfolio:
Q-1: Do you have any liquidity need within the short span of 6 months?
Ans: If you need some liquidity from Risky Asset allocation within short duration in next couple of quarters, it is prudent to take some chips out of the table now. It’s better to keep that allocation in some liquid or debt funds and keep earning 7% p.a. yield on it, rather than risking those funds at the mercy of market.
Q-2: Whether Risky Asset portfolio will fetch 12-13% p.a.?
Ans: Yes, Risky Asset portfolio shall give 12-13% p.a. or higher safely (remove it) but only if your investment horizon is 3-5 years down the line. But for the next 6-8 months upside is limited.
Q-3: What is the ideal Asset Allocation now?
Ans: It is a good time to stick to the disciplined investing which says, it’s better to reduce Risky Asset’s exposure at higher PE multiple and wait patiently for correction either price correction or time correction. Indian markets are trading at PE 21x. It is better to get chips out of the table.
Today, worldwide economies are battling against inflation and due to which all of the respective Central Banks has changed their monetary policy. As an investor we must be looking for “Fed Pivot”. It occurs when US Federal Reserve changes its monetary policy.
What is FED Pivot?
Whenever, FED decides to reverse its monetary policy i.e. whenever FED decides to cut interest rates after regular rate hikes to fight with the inflation. That change in monetary policy is known as FED Pivot.
What is the importance of Fed Pivot for investors?
As and when it occurs, it impacts the securities in the financial market which can either be loss making or profit making situation for the investors. Irrespective of the results, one thing is sure that market volatility shall increase tremendously.
A change in the policies of the Federal Reserve can impact the functioning of financial institutions, the business and livelihoods of the people across the globe. Investors must keep this under consideration while investing in the market.
The fed pivot could stabilize the rising inflation and cause the value of securities to go up or there is always a possibility of market crash.
Today, Global Markets are at the mercy of US Fed decision making related to their Monetary Policy. Fed has clearly stated that it is looking to reach its targeted inflation of 2%. Hence, few more hikes are round the corner before pausing. On the macro front, Indian equity is trading at 21.4x on FY23E, which is quiet expensive compared to global peers. Global growth is also slowing down because of continues rate hike across the globe. This do not bodes well for equity market. It is highly recommended reducing exposure to Risky Asset at current juncture to grab the opportunity in future.
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