There is a bearish sentiment on Dalal Street. Inflation concerns are now global. Experts from Morningstar Investment Management’s team shares their views on the current state of the market and how they are reading the global scenario.
Dhaval Kapadia, Director, Portfolio Specialist, on how Indian investors must act in the current bearish market.
One needs to view the recent correction in markets in the context of the strong performance witnessed since the lows of March 2020, with markets generating more than 100% returns across large, mid and small cap segments. With this backdrop, the 3- and 5-year returns look fairly normalised (in the range of 15 to 20% annualized).
In terms of valuations, the market is now trading above its long-term average and appears to price a strong recovery in earnings growth and resumption of the private capex cycle over the next couple of years. On the other hand, risks related to higher crude and commodity prices feeding into inflation and tapering of bond purchases by the U.S. Federal Reserve don’t seem to be priced in fully by the market. Some of these risk factors have resulted in the corrections witnessed recently.
At this stage it’s premature to state that the sentiment has shifted from bullish to bearish as the fall has been to the tune of 6-8% only. Clearly, mutual fund investors will see negative returns from a short-term perspective (1 to 3 months) but as mentioned earlier, the 3- and 5-year returns still look strong.
Investors with a long-term horizon (5 years and above) and above average risk appetite can maintain higher allocation to equities in their portfolios.
Long-term investors should continue with their SIPs and not try to time market. The purpose of SIPs is to ensure disciplined investing and buy fewer units of a fund when markets are ‘high or rising’ and more units when markets are ‘low or in a correction mode’. SIP amounts should be linked to one’s goal value and generally increase as one’s income rises rather than be driven by the vagaries of markets. Don’t try to time the market.
What does not change is that the basic principles of asset allocation stay. The mix of various asset classes - domestic equity, international equity, debt, gold, real estate, etc. - in a portfolio is a key driver of its performance, in terms of risk and return, over the long term.
Focus on your asset allocation and check whether it’s aligned to your goals and risk appetite. Typically, during sharp market corrections, allocation to equities would tend to fall vs. debt. Accordingly, one can consider rebalancing their portfolios and making fresh investments into the asset class that has underperformed and if allocations are lower than target levels.
Dan Kemp, Chief Investment Officer, on where he sees opportunity around the world.
The U.K., Japan, and some Emerging Markets look more attractive – China and South Africa in particular.
China: The once-booming technology sector has been struggling in recent months following government intervention in some areas. When everyone starts running away from an asset class, that is normally when we get the most interested. While there are some reasons to be careful, the sell-off has been overdone.
South Africa: The REIT market has already had a strong year, recovering effectively from a difficult 2020 when it suffered under the impacts of Covid. Despite this recent rebound, the market is still trying to recover from a longer downward trend since 2018.
United States: Underweight. It is not that Apple, Microsoft, Amazon, Facebook and Alphabet are not good businesses, but simply too expensive.
Daniel Needham, President, with a positive perspective on inflation in the U.S.
Current inflationary trends are simply sending a signal that we need more shipping capacity, we need to be able to produce more many more automobiles, we need more semiconductors, and we need more chips. Such a signal is super valuable because it prioritises where people should allocate their scarce resources.
Wage inflation too is positive. Over the past 30 years, wage growth for the median household has been appalling. Now wages are rising, and it is a good thing, as rising wages can support a self-reinforcing economic cycle.
Dan Kemp and Daniel Needham shared the above mentioned views with Investment Week.
