What’s In Store For Investors Now?

It’s been a roller-coaster year for investors with the prospects of a global recession looming large and the liquidity tap drying up amidst rising inflation. Here’s what you should be doing with your three main portfolio asset classes. 

Gold  

Gold, the darling of Indian investors, has had a rough year. Coming back into focus in the aftermath of the pandemic which led to unprecedented risk aversion, the yellow metal soared past the $2,000-mark in September 2020 and then again in March this year when the Russia-Ukraine crisis unfolded. It’s been on a steady downtrend since then, falling to as low as $1,640 as on date. Domestic gold, trading around Rs 50,000 (down by around 10 per cent from its March highs), has also been impacted, albeit to a lesser degree due to the fall in the rupee and the increase in customs duty. What’s the way forward for gold from here, and should it be part of your portfolio as we head into the festive season? 

Broadly speaking, the yellow metal is caught in a tug-of-war between opposing forces. On one hand, we have the Fed’s aggressive stance towards inflation which may result in a flight of capital from gold to treasury bonds. On the other hand, we have the ongoing geopolitical tensions, a potential risk-off sentiment as well as a possible correction in the US dollar supporting the gold investment narrative. 

Given the uncertain global economic environment, it would be prudent to cash in on the corrected gold prices and allocate anything from 10 per cent to 20 per cent of your portfolio to gold funds or gold ETFs at the moment. However, make sure you stagger your way in through SIPs or STPs. 

Stocks 

The past year has, by and large, been a phase of consolidation for domestic equities. Unbridled liquidity had fuelled a meteoric rise in stock prices across market caps between April 2020 and October 2021, and it was a matter of time before the party tapered off because the pendulum had swung well past what fundamentals would have commanded at that stage. 

The underlying thread for 2022 has been the geopolitical tensions surrounding the Russia-Ukraine war and its subsequent impact on commodity prices that led to a series of aggressive rate hikes by the RBI. However, we may see further rate hikes going on pause going forward. The year has also witnessed an interesting trend in which domestic fund flows have effectively countered foreign outflows and cushioned the blow for investors. FPIs cumulatively recorded a net outflow of $21.4 billion since the start of the calendar year; in the same timeframe, DIIs recorded a net inflow of $31 billion! This is a positive sign. 

What’s the immediately visible outlook like? Uncertain global macros and interest rates may well affect exports and foreign flows in the near term. And despite all the brouhaha, domestic macros remain positive; a strong revival in private consumption, stable GST collections, positive monsoons and robust non-food credit growth are a just a few signs pointing to a relatively robust economic revival in the making. Besides these factors, domestic demand, manageable inflation and a strong banking system should allow the revival to continue. Investors are advised to continue accumulating equities systematically with a 5–7-year view, with a diversified approach across large, mid and small caps. 

Bonds 

Domestic bond yields have been quite volatile this year. The 10-year gilt started the year at around 6.4 per cent before rising steadily till June, peaking out as high as 7.6 per cent, a 120 bps rise in the space of barely five-odd months before correcting and bottoming out around the 7.1 per cent mark earlier this month – only to start inching up again (rising yields are bad news for fixed income investors)! Amidst the volatility, Dynamic Bond Funds have had a torrid time, with the category average return standing at a dismal minus 1.88 per cent as of 29th September. 

Brent Crude, which had spiked to an astronomical $112 by June in the aftermath of the Russia-Ukraine war, has now fallen to a more circumspect $87 amidst fears of a global economic slowdown. The broad-based fall in commodity prices did assuage some of the inflationary concerns, with the CPI easing to 6.71 per cent in July, as against 7 per cent plus in the previous three-month period. Going forward, we can expect the CPI to hover around the 6 per cent mark for the next year, giving the central bank some room to ease the pace of rate hikes going forward. 

What’s the outlook on bond yields at this point? Technicals indicate that in the near term, the 10-year G-Sec will likely trade in a band between 7.15 per cent and 7.55 per cent, as the range appears to be flattening and terminal inflation seems to be more or less factored into current yields. However, the short end of the curve may inch higher for the rest of the year. 

What should fixed-income investors do? The most rational bet seems to be in the 3–5-year segment. Investors with a slightly higher risk appetite may also consider a tactical play on long-term gilts to profit in case inflation stabilises and yields fall. However, accumulations in gilts should be done systematically over the next three months instead of in one shot.