Emerging markets are more affected by such a macro situation. Many EM countries, including some of our neighbours, have been in economic trouble. This is leading to redemption of FIIs from emerging market, which we have seen in India since October last year. India is however better placed to confront the current situation.
- Economic activity has been strong since the Omicron scare. Strong growth is also being seen in the services sector, which has been a laggard for the past two years.
- With crude oil at USD 100/bbl, the current account deficit for FY23 will likely be around 3% of GDP. This is lower than the 4.5% levels in FY12-13.
- External debt levels remain low. The forex reserves are sufficient to cover the projected CAD payments and external debt payments.
- Inflation differentials among India and the developed world are lower than those observed in FY12/13.
India is economically better placed to deal with the current situation. However, the market’s starting valuations are still high despite recent corrections. This scenario requires caution and careful planning. Investors should be prepared for volatility in the next 6-9 month. Investors should expect lower returns than they did in the past two years and should not expect to see them make similar returns. Balanced advantage funds allow investors to switch between equity and debt. Conservative hybrid funds are better for conservative investors. SIP/ STP allows for the gradual accumulation of investments in small and medium cap categories over the next 6-9months.
In the last two years, small and mid-cap stocks have outperformed large caps. Small and mid-cap companies are more at risk when liquidity is tightening, and interest rates are rising. Short term debt funds and dynamic funds are the most preferred types of debt funds.
We believe that such a macro environment favors value stocks over growth stocks. We have seen growth style outperform value style in the last decade due to low inflation and abundant liquidity. Growth stocks are similar to long-term bonds. Cash flows over many years are discounted in price, resulting in high multiples. The period of very low interest rates was very beneficial for growth stocks but extremely difficult for value investors. The road ahead will be different, which could restore some of value strategy’s appeal.
(The author is George Heber Joseph, CEO & CIO of ITI Mutual Fund. His views are his alone
