Making sense of the markets in 2022 and how to invest from here – Times of India

by ET Money
July was an important lesson for investors. This is advised over and over again: don’t try to time the market. Ignore the noise and keep investing.
Sensex and nifty Gained over 8% in 50 months. This is the first time since August 2021 that both the indices have gained so much.
If you have stayed the course, the color of your portfolio is probably green. Even mid-cap and small-cap indices joined the party, rising 11.7% and 8.9% respectively. But if you were swept away by panic and fear, August must have started with regrets.
Of course, it took a lot of courage for investors to stay calm over the past seven months. The markets have tested everyone’s nerves. But it can’t all be gloom and doom here. At least that’s what it seems from the figures.
But before we get into the silver lining around the dark clouds in the markets, a little background.
The Perfect Storm: War, Inflation, and Interest Rates
Since the start of the year, everything that could have gone wrong has gone wrong. First, it was the Russo-Ukraine War that broke out in February. As markets price under the influence of this development, we have seen interest rates rise around the world.
Rising interest rates always reduce the attractiveness of investing in a risky asset class like equities. Investors gravitate towards risk-free assets because they suddenly turn out to be quite good. Remember the forgotten FD? Their interest rates are slowly rising. For example, Bajaj Finance, India’s largest NBFC, offers a higher interest rate of 7.5% p.a. on 44-month deposits. Seniors get 7.75% per annum
It is no coincidence that foreign institutional investors have pulled out $26 billion from Indian equities in the past six months as US interest rates rise. Indian investors are also showing a similar trend of not being attracted to equities. As the market corrects, opening new demat accounts and new investors signing up for mutual funds have simultaneously slowed down, and so has SIP inflows.

Question on everyone’s mind: How will the stock market run?
Looking at the July rebound and the August follow-through, everyone has a question. What will happen in the stock markets going forward?
No one can predict the market with certainty. We won’t do that either. Let’s reconstruct the past and the present to gain clarity. To do this, we must first look at the causes of volatility. It lacked clarity on three aspects.

  • To what extent can interest rates rise?
  • What will be the pace of increase in rates?
  • How long will central banks keep raising rates?

We turn to history for signs. In the last 20 years, the highest return on 10-year government securities was 9.18% (July 2008). The current 10-year government securities yield is at or around 7.2%, falling from 7.49% in June this year.
Whether India breaks that historic high, no one can predict. But one can say with certainty that it will depend on inflation, which will then determine the repo rates, which will ultimately guide the G-Sec trajectory.
But we have seen similar situations before. Therefore, we analyzed the repo rate and G-Sec trends of the last 20 years and studied their correlation. Here’s what the data shows:

  • On an average, G-Secs are 1.16 times the repo rate. A few months ago (April 2022) the highest was 1.8 times. The second highest was 1.7 times in January, February, March and May 2022. (Surprising all highs are in 2022, isn’t it?)
  • Presently, government securities are 1.5 times the repo rate.
  • The spread between the G-sec and the repo rate generally narrows as inflation gradually falls.
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If you go by the recent data, inflation is already showing signs of peaking. RBI also sees signs. Therefore, we do not consider the possibility of a significant increase in the repo rate from the current levels, unless there is an inflationary surprise or the geopolitical situation worsens. A hike of 25-50 bps is expected in the upcoming monetary policy, largely influenced by the markets.
Unknown is the US Fed. If irrigated The primary objective of the RBI would be to continue the high pace of interest rate hikes if policy rate hikes are sustained. The focus will be on preventing excessive depreciation of the rupee and not on isolating inflation.
The good news: After the policy rate hike of 75 basis points on July 27, the US Fed has indicated that the pace of further rate hikes may moderate.
This is where the historical relationship between the G-sec and the repo rate matters. Even if there is scope for an increase in the repo rate, the fixed income rates may not increase drastically, as reflected by the correlation of the past G-Secs and the repo rate.
Currently, the spread is much wider and may be less, as has been the case in the past. So, while interest rates may continue to rise, if history is a reliable guide (which we believe it is) there is little room for them to rise unabated.
While the current volatility in equities has been mainly on account of interest rates, there are other factors which seem to be turning positive.
A Silver Lining for Equity?
Since its peak in October 2021, the Sensex has seen a price correction of around 7%. But in terms of earnings from the price of the Sensex, there has been a huge fall of 22.62 per cent in the valuation. This valuation correction has brought its previous P/E ratio to 22.85 as of June, slightly above its long-term average.

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India ink. Q1 earnings have shown mixed results so far, and business conditions will remain tight as interest rates continue to peak. This indicates that runaway EPS growth is unlikely. Hence, as an equity investor, the ride can be bumpy.
Also, it would not be wise to ignore fixed income as an asset class because rates tend to be positive in real terms (returns after accounting for inflation).
Given the current trends, risks, valuations, history and positive real interest rates, long-term investors should also take a balanced approach rather than 100% equity allocation. You can do this by following asset allocation Strategy, which can help deal with volatility.
Investors generate returns by staying in the market, giving their investments time to compound. However, once you get into the game, it is difficult to ignore the market movements and stay immune to the daily noise. Tough times can wreak havoc on our emotions and make us greedy, fearful, risk-averse or intimidated. Asset allocation and asset rebalancing strategies can reduce risk and optimize returns. This is what ET Money talented is designed to.
Genius creates an investment plan that relies on risk management and asset allocation as the primary way to generate returns. The intelligence behind Genius narrows down the risks of each investment plan based on the personality of the investor. Every month, Genius generates the most appropriate asset allocation and alerts its member investors so that they can seamlessly rebalance their portfolios. It is our endeavor to ensure that the members of Genius are less surprised by the mood swings of Mr Market.
The outlook reflects in the recommended equity allocation of our two high-risk investment strategies of high growth and development:

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ground level
Markets are not about equities alone. These include debt and gold as well. Each of these asset classes performs at different times. Investment strategies based on asset allocation and periodic rebalancing protect your portfolio from massive bleeding. Such investment strategies also reduce volatility in your portfolio and create favorable conditions for you to “stay invested”.
All of these factors ensure that you “give time” to your portfolio. That’s when compounding happens, and you don’t miss out on the big gains we saw in July.
If you have already learned how to time your investments, then you are a gifted investor. So, be genius. If not, you should consider upgrading to Genius to benefit from its smart asset allocation and rebalancing strategies.
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