How to invest in gold, equity, fixed income assets? Motilal Oswal answers

The number of stocks generating positive returns within the Nifty500 universe has narrowed from 452 in the first quarter of fiscal year 2024 to 268 in the fourth quarter of FY24, according to a report by brokerage Motilal Oswal. In the last quarter (Jan- March 2024, 70% per cent of large Cap universe generated positive returns vis-a-vis 57 per cent in Midcap and 45 per cent in small caps, it said. 

The report also indicates a shift in sector performance. Sectors that were lagging earlier, such as Finance (non-Banks), Auto, and Healthcare, have become the top performers in the last quarter. Conversely, sectors that dominated the rally earlier, like Power and Infrastructure, are now starting to lag.

 MOPW's recommendations suggest a cautious yet optimistic approach to equity investing. They believe that Large Caps are a good value proposition at present, but recommend a more measured approach for Mid and Small Caps.

 

Mutual Fund inflows

Since August 2023, Multicap and Flexicap funds have witnessed the highest inflows. In contrast, Midcap and Small Cap funds have seen a declining trend in inflows since October 2023.

"Over the last five years, India's capital markets have witnessed vibrant participation from domestic retail savers, with Demat accounts surging to 151 million in March 2024 from 36 million in March 2019. India Inc. has raised $ 92.9 billion through primary markets during this period. Expectations of political continuity augur well for market sentiment. Corporate earnings growth may witness moderation relative to the pace witnessed over the last few years but is expected to remain steady given the robust health of India Inc balance sheets and the ongoing capex cycle. BFSI, Infrastructure and manufacturing are likely to be the key focus sectors going forward," said the brokerage.

Where to invest?
MOPW's Temperature Gauge Index suggests that Large Caps are in a fair valuation zone.  Motilal Oswal recommends a combination of lump-sum and staggered investment approaches:
 

Lump-sum investment for Large Cap & Multicap strategies across Mutual Funds (MF), Portfolio Management Services (PMS), and Alternative Investment Funds (AIF).
 

Staggered approach (investing in parts over time) for select Mid & Small Cap strategies over the next 6-12 months.

Importance of asset allocation

Motilal emphasizes the importance of having an Investment Charter and Asset Allocation plan. This helps investors stay disciplined and avoid making impulsive decisions based on market timing.

In simpler words:

Based on their internal valuation gauge, MOPW believes that Large Cap stocks are currently priced fairly.

They recommend investing a lump sum amount in Large Cap and Multicap mutual funds, PMS, or AIFs.

For Mid and Small Cap stocks, they suggest a staggered approach, where you invest smaller amounts over a period of 6-12 months.

Fixed income portfolio strategy: 

The brokerage recommends increasing duration in the fixed income portfolio with the expectation that yields will soften in the next 1-3 years. This means investing in bonds that mature further out in the future. Here's a breakdown of their recommended asset allocation:

65% - 70% of the portfolio should be invested in a combination of:

G-Sec roll down strategies (investing in government securities with maturities of 10-14 years)

G-Sec MFs (mutual funds that invest in government securities with an average maturity of 20-30 years)

30% - 35% of the portfolio can be allocated to higher-yielding assets to improve overall portfolio yield:

Select high yield NCDs (Non-Convertible Debentures)

Private Credit strategies (debt financing provided by non-bank lenders)

REITs/InvITs (Real Estate Investment Trusts/Infrastructure Investment Trusts)

A small portion of the portfolio can be allocated to arbitrage/ultra short term/liquid/overnight funds for liquidity management purposes.

MOPW suggests allocating to gold as a hedge against market volatility

"Gold prices have witnessed a surge in recent months, attributable to demand from China and ongoing geopolitical events. Allocation to Gold can act as a hedge against any heightened volatility in a portfolio constituting risk assets. Silver continues to have strong demand outlook because of factors like Industrial demand boost ,Boost in Manufacturing and Industrial activity in China, Potential for pickup in Green tech, etc," it said. 

Here's a table summarizing the fixed income portfolio strategy:

Cyclicals Driving Capacity Utilization

A notable trend in India's growth story is the improvement in capacity utilization, largely driven by cyclical and capitalintensive sectors such as auto, metals, capital goods, cement, and petroleum products. "This suggests that corporates are investing to keep pace with rising demand. Capacity utilization stood at a healthy 74% in Q2 FY24 and is expected to have risen further based on the surge in manufacturing PMI during Q4 FY24," said the brokerage.

The uptick in volumes is primarily led by sectors related to manufacturing and infrastructure, rather than fresh capacities, indicating that the private capex cycle is still in its nascent stages. On the flip side, consumption-linked sectors are witnessing muted volume growth, with some segments like apparel, furniture, electronics, wood, tobacco, and chemicals even seeing a sharp slowdown, it added.

Corporate Profitability & Investment Outlook

The corporate profit upcycle in India is showing signs of sustainability. "While the current pace of expansion may moderate, double-digit profit growth is still likely, given benign commodity prices and rising demand. Importantly, corporate balance sheets are healthier than in previous cycles, with companies having raised resources from equity markets, keeping leverage under check," said Motilal Oswal.

FY 2023-24 was a strong year for Indian equities, with the S&P BSE Sensex and Nifty 50 clocking gains of 24.85% and 28.61% respectively. However, the markets told a tale of two distinct halves. While broader markets outperformed frontline indexes in the first half, large caps took the lead in the latter part, especially post the state election results in December 2023.

The Nifty surged nearly 11% from December to March, while the median return of the top 250 small caps was just 3.8%. In fact, 34% of the top 500 companies and 42% of small caps delivered negative absolute returns during this period. 

"This disconnect between the Nifty and broader markets could be attributed to factors such as attractive relative valuations of large caps post the small and mid-cap rally, regulatory concerns over potential overheating, and resumption of FII flows which favor large caps," said the brokerage.