The markets have been volatile since October but things have become worse since the war in Ukraine started. While the geopolitical tension itself should not impact the markets too much (as witnessed by analyzing the history of the impact of wars on market returns) with the Ukraine-Russia war Indian market has been seeing broader risks due to supply chain disruption.
Having said that, we could see the markets jump back up at a rapid pace once this conflict de-escalates. As seen in the chart below, the Nifty PE is at historically undervalued levels and has a huge scope to grow once the conflict is over.
While the trade and corporate sectors might not see a direct hit, the global inflation in crude and commodity prices will be a worry for India. The banking sector seems to be robust in light of the crisis.
The prospects of rate hikes have been spooking the market even before the war. With crude prices rising the US inflation is not going to come down, which is why we can expect the hikes to come soon. Even though the FED might delay the hikes a little bit due to the conflict.
The Indian economy is inherently strong with good growth numbers and controlled deficits. We expect the hikes to have a moderate impact and the post-hike trajectory to be positive.
All sectors and industries have struggled in the last 6 months and so have our portfolios. In light of the volatility, we have deallocated away from equities in most of our portfolios, and in multi-factor portfolios, we have added gold as well.
While we will be on the lookout for further deallocation if volatility escalates, we believe that in the long term the markets will be strong. This is the time to hold on to the conviction for the long term and not be bogged down by short-term noise.
In our portfolios Banking, Metals, and Energy allocations have increased recently and you’d see that we have shifted to large caps.
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