The information contained herein (the “Information”) may not be reproduced or disseminated in whole or in part without prior written permission from the Company. The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared based on publicly available information, internally developed data and other sources believed to be reliable. The directors, employees, affiliates or representatives (“Entities & their affiliates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy, reliability and is not responsible for any errors or omissions or for the results obtained from the use of such information. Readers are advised to rely on their own analysis, interpretations & investigations. Certain statements made in this presentation may not be based on historical information or facts and may be forward looking statements including those relating to general business plans and strategy, future financial condition and growth prospects, and future developments in industries and competitive and regulatory environments. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, they do involve several assumptions, risks, and uncertainties. Readers are also advised to seek independent professional advice to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this document shall not be liable in any way for direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of the lost profits arising from the information contained in this material. Readers alone shall be fully responsible for any decision taken based on this document.
Copyright © 2022 Fintso
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1. EQUITY MARKETS & THE END OF FREE MONEY

The world’s stock markets witnessed heightened volatility in the first month of 2022 as investors prepared for tighter monetary policy. The S&P 500 (proxy for the US market) and Nasdaq (a tech-heavy index) suffered their worst monthly declines since March 2020, falling 5.3% and 9.0%, respectively. It was also the S&P 500′s most significant January decline since 2009. Markets elsewhere have also witnessed similar volatility. Investors flocked out of growth-oriented technology companies as higher interest rates would lower the value of the future profits of these companies

EQUITY MARKET PERFORMANCE



The US Fed signaled that it would raise interest rates in March to bring inflation under control. That will be the first increase since 2018. The Fed also signaled that it would wind down its bond-buying program, which expanded during the pandemic. We believe that markets will soon learn to live with tightening monetary policy and reward companies with strong earnings growth. To benefit from the ongoing volatility, we continue to recommend allocating to equity through the SIP route.

RUSSIA’S ROULETTE

Tensions between Russia and Ukraine are showing no signs of abating. While we expect the deadlock shall be resolved through diplomacy, we are watching for the impact on asset prices if the conflict escalates. Energy and commodity markets could see an immediate effect if the situation worsens. Also, the ripple effects could be more broad-based and impact global inflation expectations and monetary policy.

When the world is dealing with rising energy prices and supply-demand imbalances in several metals and commodity markets, a steady supply of commodities from Russia is crucial. Russia is one of the world’s largest exporters of critical metals. Any disruption to these exports could amplify global inflation.

History tells us that geopolitical issues are simmering all the time, and such conflicts do not have a lasting impact on the markets. If a resolution is achieved, the markets will react positively. Even in the case of a stalemate, the markets might shrug off fears of a worse outcome.

THE SURGE IN OIL PRICES

The rally in the crude prices shows no signs of slowing down as pressure emerges from both the demand and supply sides. The global output has fallen short of consumption by an average of 1.4 million barrels per day last year, bringing the cumulative inventories to the lowest level in 7-years. As economies emerge from covid-19, we expect demand for crude oil to remain elevated. Also, given the series of supply outages, it has put $100 crude prices within reach

FIXED INCOME OUTLOOK: BRACE FOR IMPACT

Given the inflationary environment and central banks across the globe winding up ultra-loose monetary policies, the 10-year government security yields in India have increased by around 35-40 bps since the beginning of this year. The higher borrowing requirements of the center (as projected in the Union Budget) to fund the fiscal deficit, borrowing from the state governments, and revival in private credit shall put pressure on liquidity and bond yields. Such an increased supply of bonds in the market shall negatively impact the fixed income market.

As we expect interest rates to be volatile, it is best to avoid funds investing in long-dated securities. Thereby, investors can consider investing in securities with shorter maturity (short duration funds and banking & PSU funds). Also, one can consider investing in floater rate funds as returns are adjusted based on prevailing yields in the market. To benefit from the steepness of the yield curve, one can invest in funds with 2.5 to 4 years of duration and run a rolldown strategy.

EQUITY OUTLOOK: THUMBS UP

The government’s growth and capital expenditure focus in the budget is positive for equity markets and has essentially put India back on its growth trajectory. This investment-led growth could provide a boost to jobs and incomes. We expect equity markets to perform well with long-term drivers in play and earnings for corporate India likely to rebound. In the near term, there are several headwinds such as US Fed tapering, geopolitical tension, and rising crude prices which could lead to increased volatility in the market. We believe that such market volatility should not concern investors with long-term investment horizons. Over time, this market volatility would be a minor blip (drawdown) in their overall returns. Also, investors with excess liquidity should use this market volatility as an opportunity to deploy funds.

Choosing the right mutual fund is one of the most critical and challenging decisions an investor/advisor must make. Our focus here is on ‘choosing the right’ over ‘choosing the best performing’ as we believe it would be impossible for anyone to predict the best performing mutual funds consistently.

The question then arises which are the right mutual funds to be considered for investing. We follow the analytical approach for recommending funds, focusing on three tenets viz. past performance, the manager’s ability to identify trends in the market, and their stock picking ability. We perform the entire process of fund selection every quarter to check for any deviation in our recommended funds.

The table below lists our recommended funds across different categories based on the December-end data.

UPDATE ON GLOBAL INVESTMENT PORTFOLIOS

The Disruptive Innovation Portfolio (DIP) and the Megatrends Portfolio (MT) have investments in high growth/mid to smallcap tech stocks exhibiting high revenue growth but little to no net income. This group of stocks did exceedingly well during the period Jan 2020-Third quarter 2021 for multiple reasons:

The US Fed responded very aggressively to the pandemic that caused massive economic disruptions. Not only had they cut the Fed Funds rate to zero, but they were also aggressively printing money by actively purchasing bonds. At the same time, the government was aggressively doling money out to individuals and corporations, much of which ended up in the stock market. The DIP and MT group of stocks were particular beneficiaries of these fiscal and monetary actions:

  • They were growing fast
  • The discount to future earnings was small as inflation was nonexistent
  • Many of them were considered big beneficiaries of Work From Home (WFH)


Since the last quarter of 2021, these trends have reversed dramatically, and these stocks have performed very poorly. The DIP and the iShares Russell 2000 Index (smallcap index) represent these trends (chart 1).

The information contained herein (the “Information”) may not be reproduced or disseminated in whole or in part without prior written permission from the Company. The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared based on publicly available information, internally developed data and other sources believed to be reliable. The directors, employees, affiliates or representatives (“Entities & their affiliates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy, reliability and is not responsible for any errors or omissions or for the results obtained from the use of such information. Readers are advised to rely on their own analysis, interpretations & investigations. Certain statements made in this presentation may not be based on historical information or facts and may be forward looking statements including those relating to general business plans and strategy, future financial condition and growth prospects, and future developments in industries and competitive and regulatory environments. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, they do involve several assumptions, risks, and uncertainties. Readers are also advised to seek independent professional advice to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this document shall not be liable in any way for direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of the lost profits arising from the information contained in this material. Readers alone shall be fully responsible for any decision taken based on this document.
Copyright © 2021 Fintso