Motilal Oswal Private Wealth (MOPW) has recently underscored the remarkable resilience of the Indian domestic equity market, despite facing challenges from unfavorable global events. The firm’s analysis highlights the significant contributions of corporate earnings and robust domestic institutional investor (DII) inflows as primary drivers of stock market performance over the past three years. Notably, since the beginning of calendar year 2021, DIIs have injected nearly $90 billion in net inflows into the market—an amount nearly ten times greater than the contributions from foreign institutional investors (FIIs) during the same period. MOPW emphasizes that the structural megatrends of increased retail participation and the financialization of savings are likely to continue supporting domestic equities in the foreseeable future.
Equity Market Strategy
In its evaluation of the current market conditions, MOPW has provided insights into stock valuations. The firm notes that while large-cap stocks appear fairly valued, mid- and small-cap stocks are generally more expensive on average. Despite the elevated valuations, MOPW projects that the earnings growth expectations for mid- and small-cap stocks will surpass those of large-cap stocks over the coming years.
Sector rotation is anticipated to persist, prompting MOPW to recommend a staggered investment approach. Specifically, the firm advises investors to spread their investments over three to six months for large-cap and multi-cap strategies. For mid- and small-cap stocks, a longer staggered investment timeline of six to twelve months is suggested.
MOPW maintains a positive outlook on equities, bolstered by strong economic growth, increased capital expenditures, and anticipated rate cuts. The firm advises investors who find their equity allocations below desired levels to consider enhancing their exposure. This should be done using a staggered investment strategy, with accelerated deployment in the event of a significant market correction.
An Overview of the Indian Economy
In its September 2024 Alpha Strategist report, MOPW reflects on the evolving phases of the Indian economy over the past decade. The firm notes that in fiscal year 2013, India was categorized as a fragile economy, characterized by low GDP growth of 5.5%, high inflation at 10%, and a twin deficit reaching 10% of GDP. However, by fiscal year 2017, the economy had rebounded, entering an expansion phase with an impressive GDP growth rate of 8%, inflation reduced to 5%, and a twin deficit cut to 4% of GDP.
Following a slowdown triggered by the non-banking financial company (NBFC) crisis in 2018-19 and the COVID-19 pandemic in fiscal year 2021, the economy has now transitioned into what MOPW describes as a “Goldilocks phase.” This phase is characterized by stable GDP growth at 7%, moderate inflation of 4.5%, and a well-managed twin deficit amounting to 6% of GDP.
Furthermore, India’s foreign exchange reserves have been on a steady upward trajectory, reaching USD 680 billion. A well-managed current account has contributed to the stability of the Indian Rupee, which has remained within a narrow trading range against other currencies.
Fixed Income Portfolio Strategy
Turning to fixed-income investments, MOPW emphasizes the importance of maintaining a duration bias in portfolios to take advantage of anticipated softening yields over the next one to two years. The firm recommends that 30% of fixed-income portfolios be allocated to actively managed duration funds and long-term government securities. This strategy aims to generate accrual income while also capitalizing on potential mark-to-market gains.
MOPW also advises investors to allocate between 30% to 35% of their portfolios to multi-asset allocation funds and equity savings funds. These funds are designed to deliver higher returns than traditional fixed-income investments while managing moderate volatility.
To enhance overall portfolio yield, MOPW suggests allocating another 30% to 35% of fixed-income portfolios to private credit strategies, Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), and select high-yield Non-Convertible Debentures (NCDs). For effective liquidity management, investments can be directed towards floating rate and arbitrage funds.
Investment Takeaways
As MOPW outlines its recommendations, several key takeaways emerge for investors looking to navigate the current market landscape:
Staggered Investment Approach: Given the anticipated market conditions, investors are encouraged to adopt a staggered investment strategy, particularly for mid- and small-cap stocks.
Focus on Economic Indicators: The positive outlook for equities is underpinned by robust economic indicators, making it crucial for investors to remain attuned to macroeconomic trends.
Diversification in Fixed Income: Allocating portions of fixed-income portfolios to various asset classes can help enhance returns while mitigating risk.
Long-Term Perspective: With structural megatrends supporting domestic equities, a long-term investment perspective is advised to fully realize potential gains.
Monitor External Factors: Investors should remain vigilant regarding global events that may impact local markets, balancing their strategies accordingly.
Conclusion
In summary, Motilal Oswal Private Wealth’s insights provide a comprehensive overview of the current investment landscape, highlighting opportunities in equity, fixed income, and gold markets. The firm’s emphasis on a staggered investment approach, coupled with a focus on the evolving phases of the Indian economy, offers valuable guidance for investors navigating this dynamic environment.
As the Indian economy continues to stabilize and grow, MOPW’s recommendations serve as a roadmap for achieving financial success. By adopting a strategic investment framework that aligns with both macroeconomic indicators and individual risk tolerance, investors can position themselves to capitalize on emerging opportunities in the marketplace.