After witnessing heady growth in the last close to three years, the Indian equity market could be headed for a volatile year, with several factors likely to affect its performance.
Saibal Ghosh, Chief Investment Officer at Aegon Life Insurance, feels that India could witness slower earnings growth in 2023. Moreover, China opening up this year could result in fresher allocations by foreign institutional investors (FII) moving away from India, which has higher valuations.
Irrespective of market conditions, he believes, younger investors must make larger allocations – 100 minus their age – towards equities. In a high-growth, high-inflation country like India, two asset classes – equity and real estate – should form a key part of your portfolio, he says. But given the rising interest rates in the economy, which will continue to be elevated for some time, it is a good time to invest in fixed-income instruments, Ghosh says. He recommends investing in bond and government securities (G-sec) funds in the latter half of this higher interest cycle. These funds will help make capital gains when rates start falling again.
Edited excerpts from the interview:What is your outlook for the equity market in 2023?
On the flip side, there are a couple of risks brewing. There is a concern around growth and essentially, slow growth will be on account of external reasons. Multi-year growth has been priced in the current valuation, which is where the risk might come in – we might see some disappointment in earnings on account of slowing growth and higher than anticipated raw material prices. Besides, China is expected to open up next year, which may see fresh allocations from FIIs to the cheaper Chinese market than to relatively richer markets like India. That said, no immediate steep corrections in our market are expected either. Some of the sectors are still valued below their long-term average valuations. Further, the rising interest rates will stabilise next year, the rural economy should do well in the pre-election year, and construction demand will continue to be buoyant. These all factors will balance out in the favour of a neutral stance in the equity market this year.
However, notwithstanding the tepid equity returns expected in the near term, in a growing economy like India with a significant younger population, retail investors should allocate a significant portion to equities. The younger you are, the higher should be your exposure to equities. Stay invested over the long term but be prepared to stomach higher volatility.Where do you think inflation and interest rates would go in 2023?
Growth may come down quite a bit from the perspective of a global slowdown as the US is expected to have gone into recession from the last quarter of the calendar year 2023. While dollar appreciation has been halted for the time being but given the vulnerability of our external account, the currency will continue to pose risks to domestic interest rates in FY23.Given this scenario, how should retail investors approach debt investments?
You may consider guaranteed income policies as they ensure the locking in of future investments at current high interest rates, along with providing life protection cover and tax benefits. In the latter half of this high interest rate cycle, you may further increase fixed income allocations towards bond or G-sec funds because that is where one gets the kicker in terms of capital gains when the rates start to soften again.If I have an investible surplus of Rs 10 lakh, how should I deploy these funds today?
There is no magic sauce when it comes to investments. Ascertain three aspects; your investment horizon, age, source of income (salary or business) and other individual risk attributes.
Simply put, 100 minus your age should be your equity exposure. The younger you are, the higher should your exposure should be to equity and real estate. This kind of rule-based asset allocation plan will ensure disciplined investments. In a high-growth, high-inflation country like India, two asset classes – equity and real estate – must be a part of your portfolio.
You should also consider other factors like whether you are salaried or a businessperson. If you are running a business, you cannot take too many risks by taking a large exposure to equities, as business income itself is volatile.One investment philosophy that you have followed?