Equity Portfolio needs to have a prudent mix of both Growth and Value investment styles: Motilal Oswal Private Wealth

Key Insights:

Healthy corporate earnings growth to ensure that the Indian economy moves towards USD 5-6 trillion economy size over the course of this decade

Fixed Income asset class should form part of the portfolio irrespective of risk profile

Cyclical sectors could do much better going forward, Equity portfolio needs to have a judicious mix of (Growth and Value) in both investment styles

Mumbai, Jan 9, 2023: The Alpha Strategist by Motilal Oswal Private Wealth (MOPW) highlighted that the global economies & financial markets are experiencing ‘Winds of Change’. This infers that their new economic fundamentals are getting predominant which will dramatically alter the growth trends witnessed over the last 10 years. Alpha Strategist report encapsulates the performance analogies of various asset classes during 2013-22 and provides an advisory on the ideal asset mix for wealth creation. Corporate Debt/Equity has significantly reduced to 0.6x over the last 6 years, Bank balance sheets have improved indicating that the Indian economy is expected to move to a USD 5-6 trn economy this decade. The trend of healthy corporate earnings growth over the last couple of years is likely to continue over the course of the decade and should cushion equity market valuations in India.

US S&P 500: Lead performer with CAGR of 15% in the decade of 2013-22

The decade of 2013-22 belonged to US equities (S&P500) followed by Indian equities (Nifty50) and Developed Markets (MSCI DM).

US equities (S&P500) have given staggering returns of 15% CAGR for a period of the last 10 years, which is much higher when compared with the Nifty 50 and MSCI DM of 11.9% and 11.4%, respectively. This showcases that US equities returns have outperformed Indian Equities by nearly 310 basis points CAGR over the last 10 years. Other asset classes namely MSCI EM – MSCI Emerging Index INR, Gold – Gold INR, Debt – CRISIL Composite Bond Index, Liquid – CRISIL Liquid Index, and Real Estate – RBI House Price Index have given returns in the range of 6% to 8% CAGR.

Sharing inferences from the perspective of the year 2022, Alpha Strategist report cited that Gold was the lead performer as an asset class providing returns of 13.9%. Liquid Index offered returns of 5.1% which is better than returns offered by Nifty 50 of 4.3%. The outperformer of 2013-22, US Equities gave negative returns of 10.7% in 2022. This is a testament to winds of change where a series of events in CY22 are causing a change in trend, rather intensely. The conflict in Ukraine and subsequent sanctions on Russia led to major disruptions in global supply chains along with a surge in fuel & commodity prices, thereby proliferating inflation. In a combative bid, the US Fed, along with global central banks, has resorted to hiking interest rates at the fastest pace ever historically. Higher cost of capital has led to the de-rating of equity market valuations.

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The flagship publication by MOPW has been sharing valuable insights monthly on the global and domestic economy as well as the behavior and performance of various asset classes since its first edition in Jan 2013.

According to Ashish Shanker, MD & CEO, Motilal Oswal Private Wealth, “With the rise in interest rates, Fixed Income becomes a very important asset class, and should form part of the portfolio irrespective of risk profile. Unlike the US, India does not face similar concerns on inflation, hence interest rates are likely to peak out soon domestically. The yield curve in India has flattened out with the 1-year to 10-year G-sec yields trading in a narrow band of 6.75-7.35%. We advise core allocation to the 4-5 year maturity segment through high credit quality, Target Maturity Funds which invest in a combination of G-sec, State Development Loans (SDL), and AAA-rated instruments. Tactical allocation to select high-yield private credit strategies, MLDs, REITs, InvITs can help enhance the yield on fixed-income portfolios. Gold should be treated predominantly as a hedge against heightened volatility.”

Sharing advisory on equity investments, He added, “The last decade belonged to ‘Growth’ (Earnings Momentum & Quality). The ‘Value’ style, which typically includes cyclical sectors like Financials, Capital Goods, Power, and Real Estate, underperformed. There is a likelihood that some of these cyclical sectors could do much better going forward relative to the last decade. However, we recommend an equity portfolio needs to have a judicious mix of both investment styles – Growth & Value.”

Amidst this global chaos, India is experiencing ‘Winds of Change’ that bode well for the economy & equity market.

Investors made good returns by chasing the momentum stocks

Momentum stocks gave strong returns of over 19.9% CAGR which is much higher than returns given by Quality and low-volatility stocks of 16.3% and 15.8% over the last decade. This clearly indicates that the last decade belongs to investors who were chasing momentum stocks. Nifty 200 gave returns of 13.6% while Value stocks gave the lowest return of 10.3% in the past 10 years.

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