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Geopolitical tensions continued to play a major role in shaping sentiment
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2022 has been a tumultuous year for investors across asset classes, with no clear trends emerging throughout the first half of the year in equities, debt or gold. Geopolitical tensions continued to play a major role in shaping sentiment, while easy liquidity conditions began a predictable withdrawal amidst rising inflationary fears. With half the calendar year gone by, it’s worthwhile to evaluate the three core asset classes in your portfolio from a rational standpoint.
Equity
FPI’s continued to be net sellers in June ’22, with their total withdrawals totalling USD 6.4 bn. DII’s on the other hand balanced this out by making net purchases of USD 5.97 bn. Broadly speaking, equities seem to be entering an extended consolidation phase, with a balanced interplay of push and pull factors. On one hand, valuations have moderated significantly, and the long-term view on equity continues to remain positive due to favourable demographics, healthy tax collections and strong government reforms. On the other hand, we have continued geopolitical tensions and inflationary concerns. Equities are likely to remain range bound for now, with the NIFTY showing signs of settling and forming a base around the 15K mark. Investors should consider increasing their equity allocations through staggered investments over the next 6 months.
Debt
Inflationary fears led to massive spikes in bond yields for the better part of 2022, with the 10-year rising higher than 7.6 per cent. Since then, we’ve seen crude oil, palm oil, and wheat falling by 14 per cent, 37 per cent, and 23 per cent between 5th June and 5th July. Although further rate hikes are definitely on the cards and there’s no real chance of the RBI reversing its “anti-inflationary” stance for now, it can be said that a large portion of the future rate hikes are priced into current yields. Knee jerk reactions to any future rate hikes appears quite unlikely. This seems like a good time to start adding medium duration debt to your portfolio, with a 2–3-year investment time horizon. There’s a good chance that they will provide FD beating returns, especially on a post-tax basis. Liquid fund returns should start seeing improvements as well.
Gold
Last month’s aggressive tightening of 75 bps by the fed resulted in a fall in gold prices. It is widely expected that another rate hike of similar quantum is on the cards this month, and this could further hurt gold prices marginally. However, given the lukewarm to poor outlook for global growth in the medium term, we may well see the yellow metal getting a shot in the arm later in the year. Domestic gold demand remained robust, with ETF’s recording healthy inflows. Broadly speaking, an allocation of 10-20 per cent in gold funds seems to be a prudent strategy at this stage, and would act as a much needed risk hedge as the world enters uncertain times.