WORDS OF WISDOM

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you here you want to go”

Benjamin Graham

US: RECESSION WARNINGS RISE AS YIELD CURVE INVERTS

Recession warnings are clearly on the rise. The 2-year and 10-year Treasury yield inverted for the

RBI FOLLOWS THE BANDWAGON

The RBI has unequivocally joined the list of global central banks taking decisive policy action to keep

TOP 5 GLOBAL THEMES

In the next three months, we believe the answers to the following questions will determine the direction

UPDATE: MODEL PORTFOLIOS

We ran our model portfolio engine to determine the strategic allocations for FY23. The engine works around

The information contained herein (the “Information”) may not be reproduced or disseminated in whole or in part without prior written permission from the Company. The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared based on publicly available information, internally developed data and other sources believed to be reliable. The directors, employees, affiliates or representatives (“Entities & their affiliates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy, reliability and is not responsible for any errors or omissions or for the results obtained from the use of such information. Readers are advised to rely on their own analysis, interpretations & investigations. Certain statements made in this presentation may not be based on historical information or facts and may be forward looking statements including those relating to general business plans and strategy, future financial condition and growth prospects, and future developments in industries and competitive and regulatory environments. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, they do involve several assumptions, risks, and uncertainties. Readers are also advised to seek independent professional advice to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this document shall not be liable in any way for direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of the lost profits arising from the information contained in this material. Readers alone shall be fully responsible for any decision taken based on this document.
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Recession warnings are clearly on the rise. The 2-year and 10-year Treasury yield inverted for the first time since 2019, giving us early signs of a possible recession on the horizon (since 1978, yield curve inversions have consistently provided recession warnings). The bond market is discounting weaker economic growth, earnings risk, elevated valuations, and a reversal of monetary support

The US Fed is tasked with controlling the inflation by slowing the economy but not so much that it triggers the risk of recession. Since March 2022, the Fed has already raised interest rates twice and is expected to aggressively raise rates through the year.

Higher borrowing costs reduce lending and spending in the economy, cooling the pressure on prices. However, this results in a slowing of the economy which could trigger a recession. While the Fed is hoping to achieve a “soft landing” by controlling the inflation without causing unemployment to rise or trigger a recession, market participants believe otherwise.

The US economy is facing inflationary pressures from higher energy prices due to the Russia-Ukraine war and supply-chain disruptions as Covid-19 forces new lockdowns in China. These factors threaten to worsen inflation even further.

Another challenge that the Fed faces today is the low unemployment rate. A tight labour market, where the demand for workers is far outpacing the supply, implies that companies would raise wages to attract new workers. In a sense, wages are the ultimate measure of core inflation – more than twothirds of business costs go back to labour – so rising wages put significant upward pressure on inflation.

In our assessment, the inflation problem facing the Fed today is substantial and unlikely to be resolved without a significant economic slowdown. Overall, the combination of an overheating economy, surging wages, and recent supply shocks means that the fear of recession is real

The RBI has unequivocally joined the list of global central banks taking decisive policy action to keep inflation expectations under check. In a surprising turn of events, the RBI decided to hike the repo rate by 40 bps to 4.4% and CRR by 50 bps to 4.5% amid rising inflation concerns. The surge in commodity prices and supply bottlenecks pose major headwinds to inflation.

The timing of the hike was important as it preceded the 50 bps increase in the policy rate by the US Fed. This shall ensure that the rupee is safe from any speculative attacks as forex reserves are already down by around $30 billion from their peak levels.

With inflation breaching the upper tolerance level for the past few months and expected to rise further, it was imperative for the RBI to act promptly with monetary tightening measures. Going forward, based on the evolving market situation, the RBI may further hike interest rates. These tightening measures are coming against a weak economic background to which the RBI has ensured to provide adequate liquidity in the system for productive requirements of the economy to support credit offtake and growth.



In the next three months, we believe the answers to the following questions will determine the direction of global markets and which themes will outperform:

  • How will the upcoming earnings season play out?
  • Will the world, especially the US, avoid a recession?
  • Does the Ukraine war look like a “win” for the West, for “Russia” or some other outcome such as a tentative ceasefire or continued uncertainty?
  • Do inflation numbers start to improve?
  • Is China able to control Covid outbreaks, resume full productive capacity and ease supply bottlenecks?
There are five themes that we recommend going overweight on for the next three months:

1. Global Inflation Winner

We have three sub-themes to play Global Inflation

  • Commodity Producers: The huge rise in energy prices will also boost investment in alternatives such as solar/wind/hydrogen/nuclea
  • Rising Interest Rates: Companies with major earnings in the distant future are discounted further (such as smallcap high growth), conversely, companies generating large cash flows and earnings now, are preferred
  • Food Inflation and supply: Inflation, as well as the Ukraine war, is spiking food prices across the glob

2. Ukraine War Relative Winners:

We have two subthemes to play Ukraine War relative winners:

  • Defence: The Ukraine conflict is causing a huge spike in defence spending around the world and arms manufacturers will be the winners
  • Country Winners: While US consumers are getting hurt from rising commodity and energy prices (like all consumers around the world), their stock market contains many companies that benefit from it. The US is either self-sufficient or a net exporter of energy and most commodities. Furthermore, it has little exposure by way of trade with either Russia or Ukraine
  • Food Inflation and supply: Inflation, as well as the Ukraine war, is spiking food prices across the globe

3. Tech Winners:

We have 3 subthemes to play Tech Winners:
  • Defence: The Ukraine conflict is causing a huge spike in defence spending around the world and arms manufacturers will be the winners
  • Cybersecurity: Cyber-attacks on enemy infrastructure are a big part of modern warfare and countries are strengthening their defences against such attacks. Cybersecurity software developers will be the winners
  • Mega Cap Growth: Mega Cap Growth stocks with high percentage holdings in tech giants such as Apple/Google/Amazon and Microsoft, with their dominant positions and established supply chains are expected to weather the current market uncertainties the best

4 Infrastructure Spending:
Countries across the world are investing in their infrastructure to stay competitive. Global warming trends suggest that this spending may accelerate

5 Recession Risk Winners:
In a recessionary or a slow-growth environment, consumer staples and healthcare perform the best

We ran our model portfolio engine to determine the strategic allocations for FY23. The engine works around the fundamental principle of modern portfolio theory, which provides a framework to create a portfolio of different asset classes such that the expected return is maximized for a given level of risk. Some of the observations

  • Our model portfolio shows an increase in allocation towards Equities (both domestic & foreign markets) across all profiles and a decrease in Fixed Income allocation. This has been on account of the change in the risk-reward characteristic of equity markets
  • Within domestic equities, we continue to hold higher allocation to large caps. Allocation is nearly equal between ‘large-cap’ and ‘midcap & small caps’
  • Within domestic equities, we continue to hold higher allocation to large caps. Allocation is nearly equal between ‘large-cap’ and ‘midcap & small caps’

Asset Class

Sub Asset Class

Sub Asset Class

Aggressive

Assertive

Prudent

Cautious

Conservative

 

Equity

 

Large cap

 

Mirae Asset Large Cap Fund

 

27.0

 

22.5

 

20.0

 

13.0

 

7.0

 

Midcap

Invesco India Midcap Fund

18.0

13.5

10.0

7.5

5.0

 

Small cap

Axis Small Cap Fund

5.5

5.0

5.0

6.0

0.0

 

 

Union Small Cap Fund

5.5

5.0

5.0

0.0

0.0

 

Sector/Theme

DSP Natural Resource & New Energy Fund

3.5

2.5

2.5

0.0

0.0

 

 

SBI Infrastructure Fund

3.5

2.5

2.5

0.0

0.0

Fixed Income

Corporate Bond

Aditya Birla SL Corp Bond Fund

0.0

5.0

5.0

10.0

15.0

Accrual

Banking & PSU

Axis Banking & PSU Debt Fund

0.0

0.0

0.0

10.0

10.0

 

 

IDFC Banking & PSU Debt Fund

3.5

5.0

7.5

12.5

15.0

 

 

Nippon India Banking & PSU Debt Fund

0.0

0.0

0.0

0.0

10.0

 

Corporate FD

Mahindra Finance FD

3.5

9.0

12.5

15.0

15.0

Gold / Commodities

ETF

Nippon India Gold Savings Fund

5.0

5.0

5.0

5.0

5.0

 

Thematic

ICICI Pru Commodities Fund

5.0

5.0

5.0

5.0

5.0

International Equity

US Equities

Motilal Oswal Nasdaq 100 FoF

15.0

15.0

15.0

11.0

8.0

Cash

Ultra Short Term

Kotak Savings Fund

5.0

5.0

5.0

5.0

5.0

Note: The funds selected might not be the exact fit but are the best representative for the above themes/sectors. Also, we have not added any thematic/sector allocation to Conservative & Cautious risk profiles

The information contained herein (the “Information”) may not be reproduced or disseminated in whole or in part without prior written permission from the Company. The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared based on publicly available information, internally developed data and other sources believed to be reliable. The directors, employees, affiliates or representatives (“Entities & their affiliates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy, reliability and is not responsible for any errors or omissions or for the results obtained from the use of such information. Readers are advised to rely on their own analysis, interpretations & investigations. Certain statements made in this presentation may not be based on historical information or facts and may be forward looking statements including those relating to general business plans and strategy, future financial condition and growth prospects, and future developments in industries and competitive and regulatory environments. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, they do involve several assumptions, risks, and uncertainties. Readers are also advised to seek independent professional advice to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this document shall not be liable in any way for direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of the lost profits arising from the information contained in this material. Readers alone shall be fully responsible for any decision taken based on this document.
Copyright © 2021 Fintso