Indian equity markets have experienced sharp corrections as a result of ongoing FII outflows, rising US yields, and weak earnings growth. One of the most significant global shifts has been the rise in US interest rates, which has been influenced by factors such as rising fiscal deficits, persistent inflation, and uncertainty over US President Donald Trump's policies. This is significant because yields are still at levels last seen in 2007-08, and markets expect yields to remain higher for longer.
Japan, another major economy and an important carry trade participant, appears to be on the path to higher interest rates following more than 15 years of ultra-loose monetary policy. According to a report by brokerage Motilal Oswal, individual stock level corrections are much more severe than indices suggest, with the average price drop in stocks from all-time highs nearly twice that of the index.
"75% of stocks in the Mid Cap 150 and Small Cap 250 Index are down more than 20% from their all-time highs. However, despite corrections, Mid Cap and Small Cap valuations remain high, while Large Caps appear more reasonable, trading below the 10-year average forward PE multiple. We anticipate that the markets will remain in this corrective to consolidation phase for the next 3 to 4 months, and that such market phases should be considered for gradual accumulation," it stated in a note.
Motilal Oswal has advised investors to increase their allocation by implementing a lump sum investment strategy for Hybrid and Large Cap Equity Oriented funds and a staggered approach over the next six months for Flexi, Mid, and Small Cap Strategies.
"With the evolving interest rate scenario, long-term yields are expected to remain higher for longer and hence, we recommend exiting Duration Strategies for fixed income investments and being Overweight on Accrual Strategies in the fixed-income portfolio," according to the report.
Fixed Income View and Portfolio Strategy: With changing interest rates, we believe the duration play is nearing its end. Long-term yields are expected to remain high for a longer period, allowing for full exit. Reserve Bank of India actions on rate cuts and liquidity are likely to result in a steepening of the yield curve. Motilal Oswal recommends that fixed income portfolios be overweight on accrual strategies.
• Allocate 45%-55% of the portfolio to Performing Credit, Private Credit Strategies, InvITs, and Select NCDs.
• 25% - 35% of the portfolio can be invested in Arbitrage Funds (minimum holding period of 3 months), Floating Rate
Holding periods for funds range from 9 to 12 months, while Absolute Return Long/Short strategies require a minimum of 12 to 15 months.
• For tax-efficient fixed income alternatives, allocate 20% to 25% of the portfolio to Conservative Equity Savings funds with a minimum holding period of three years.
