Investment strategy: Portfolio 2023: Diversify beyond stocks into bonds and gold

The year 2022 puts the global economy and financial markets to the test. The end of cheap money has led to volatility and massive declines in financial assets. The outlook for 2023 will, to a large extent, depend on addressing some of the challenges and contexts set in 2022.

Europe and the United States are at risk of recession in 2023 while China is on a bumpy road to recovery. Decoupling rarely works. Weak external demand and tighter global financial conditions are likely to slow India’s FY24 growth to ~5% (vs ~7% in FY 2023). We see 2023 as a correction year in which growth slows but at the same time becomes more balanced, setting the stage for a more sustainable recovery on the other side. The majority of growth challenges are global.

The company’s equity cycle, which has been on a modest expansion since mid-FY 22, could ease slightly in 2023. That means, a strong balance sheet, PLIs, activity Decade-long minimum investment moves and mushrooming new age industries make the case for a strong mid-term corporate capital cycle. China + 1 is a enduring reality today as global companies diversify their production in other countries. India is also on track to revive its real estate construction sector after a decade of inactivity.

Consumption is likely to become a relatively sustainable sector by 2023, supported by improving low-end employment and easing inflationary pressures. This year is likely to bring exciting opportunities in the mass consumer segment. On the other hand, wage growth in major cities in corporate jobs can be moderated by slowing global growth (as is typical for the IT sector).

Fiscal policy may not be materially consolidated in the year before an election. Capital investment by countries has been lagging since COVID. Whether this is good weather for deeper issues below or just a temporary pause could work out better in 2023. We expect the aggregate government deficit to narrow modestly. costs 20-30 basis points.

As we are optimistic about India’s medium-term earnings outlook, tax-to-GDP could improve in the coming years. Even so, carefully targeting subsidies and generating revenue is the only way that the central deficit can be consolidated at 2% of GDP by 2025-26 without affecting base spending. physical and social infrastructure.

But for global shocks, India’s inflation will be moderate in 2023. Even with commodity prices unchanged, WPI inflation will stay remarkably low. Stable energy prices and reduced aggression during core bull runs suggest CPI inflation could fall to ~5%. Food inflation still entails instability. Milder inflation means high single-digit nominal GDP growth in FY2024 (compared to 16% in FY 2023E) will be more heavily revised. However, the normalization of private credit demand and the replacement of external loans (more in the first half of 2023) will likely keep domestic credit growth buoyant.

Given our outlook for elevated government loans and risks to external capital flows, a credit recovery could result in higher capital costs, unless the RBI intervenes to normalize conditions. liquidity event. Banks’ investments in DSLR cameras could scale down in the coming months, but further declines could be capped as growth and investment costs moderate.

The RBI’s policy action in FY24 will depend not only on domestic growth-inflation dynamics but also on global financial conditions. The growing domestic inflation outlook provides the basis for a softer policy, but if global financial conditions remain difficult next year, external spillovers will prevail with continued focus. focus on how CAD will be funded.

The cost attractiveness of dollar loans has plummeted, putting capital flows associated with dollar loans at risk. BoP concerns remain. We will keep an eye on crude oil price dynamics and FII sentiment towards Indian assets. Foreign exchange reserves below $500 billion will test India’s reserve capacity.

For currency, it could be a year equals two halves. Yields on US Treasuries have fallen from a two-month peak in the last two months of 2022, and the dollar has regained some of its strength. Today, the market generally agrees with the Fed on interest rates at the end of the period but disagrees with when to start cutting rates. These assumptions can be tested over the next few months. As such, the 10-year UST and the dollar could rise before it drops slightly. The risk of INR devaluation in the short term remains. However, when we come up with the next 6-12 months, the likelihood of a repeat in 2022 will be less. Rupees may be range limited.

Indian equity is consolidating through 2022 even with high volatility. Although inflationary pressures should ease, the slowdown in growth could accelerate, casting a bleak 2023 earnings outlook. Macro uncertainty limits upside pricing through increasing equity risk premiums. As a result, 2023 could continue to be a volatile year for stocks, at least for the first half of the year.

We have a positive rating on fixed-income assets even as we see little risk from the global monetary policy trajectory, tightening domestic liquidity, rising credit and foreign capital flows. outside flows in. Our positivity stems from a maturing monetary tightening cycle, a stable inflation trajectory and valuation attractiveness relative to other assets.

From an asset allocation standpoint, diversify beyond stocks into bonds and yellow could help in 2023.

(Author: Namrata Mittal is CFA & Senior Economist)


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