What should your equity, fixed income portfolio look like? Motilal answers

Investors should adopt a cautious approach to their portfolio strategy as current global events and expensive valuations are creating uncertainties in the market, as per the  Motilal Oswal Private Wealth's (MOPW) Alpha Strategist report for October 2024.

Heightened geopolitical  tensions have led to increased volatility, rising crude oil prices, and rising bond yields, raising concerns about inflation and interest rate cuts. Indian equities, particularly small and mid-caps, are trading at significant premiums compared to long-term averages.  

A.Iran – Israel Tensions increasing volatility

• India VIX increased by 25% from lows of 12 to 15 in a span of few days.
• Q
• US VIX increased by 38% from lows of 15.4 to 21.2 in a span of few days.

MOPW’s report emphasizes that while Indian equities, particularly small and mid-caps, are trading at significant premiums compared to long-term averages, there are strong fundamentals at play. Sustained inflows from Domestic Institutional Investors (DIIs) and improved Return on Equity (RoE) across various indices act as a buffer against potential volatility from Foreign Institutional Investor (FII) outflows. However, heightened geopolitical tensions and rising crude oil prices are stirring concerns about inflation, which could impact interest rate cuts. With these risks in mind, the report suggests that it might be wise to moderate expectations for earnings growth, following four years of robust double-digit increases.

B.Impact of Iran – Israel tensions – spurt in crude oil prices
 

C.Nifty Indices – Valuation, Returns profile & expected growth

Nifty Smallcap 250 and Nifty Midcap 150 are trading at significant premium compared to long term average

RoE profile has improved across different Nifty Indices and the expected earnings growth also looks decent

MOPW suggests a staggered approach to investing, prioritizing large and multi-cap strategies in the short term and selectively investing in mid and small-cap strategies over a longer horizon.

Fixed Income Focus: Maintaining a duration bias in the fixed income portfolio is recommended to capitalize on potential softening of yields in the coming years.

Equity Portfolio Strategy

Equity market outlook continues to remain positive based on deleveraging of Corporate Balance Sheets, uptick in the Capex cycle and expected earnings to remain robust for the next two years.

However, given the uncertainties in the global context and rich domestic valuations, it is advisable to tread with caution by adopting a strategy which is balanced and resilient.

Based on their risk profile, investors having the appropriate level of Equity allocation can continue to remain invested

If Equity allocation is lower than desired levels, MOPW advises a staggered approach, recommending that investors gradually allocate funds into large and multi-cap equity strategies over the next three months. This cautious approach allows for potential market corrections and offers a balanced exposure to both stability and growth.

Selective Mid and Small-Cap Investments:

Time Frame: 6 to 12 Months

After securing a foothold in large caps, consider shifting focus to select mid and small-cap strategies. While these segments have higher growth potential, they also carry increased risk.

Fixed Income Portfolio Strategy

MOPW reiterates their view to have a duration bias in the fixed income portfolio so as to capitalize on the likely softening of yields in the next 1-2 years

30% of the portfolio can be invested in

• Actively managed duration funds to capitalize on evolving fixed income scenario

• For passive duration allocation, one may invest in long term maturity G-sec papers to benefit from accrual income and potential MTM gains

30%-35% of the portfolio can be allocated to Multi Asset Allocation funds & Equity Savings Funds

These funds aim to generate enhanced returns than traditional fixed income with moderate volatility through a combination of Domestic Equity, Arbitrage, Fixed income, International Equity. Gold &other Commodities

To improve the overall portfolio yield, 30%– 35% of the overall fixed income portfolio can be allocated to Private Credit strategies, REITs/InvITs & select high yield NCDs

For liquidity management, investments can be made in Floating Rate (9 to 12 months) & Arbitrage Funds (3 to 6 months)

 Gold Outlook

• Geopolitical tensions have added to the risk premium for gold, further escalating tensions could continue to boost safe haven appeal.
• Central bank buying, festive and wedding-related domestic demand could boost sentiments.
• Over the next 2 Years, gold could be on track to hit fresh highs in the next couple of years.