EVEN AS THE STORM-TOSSED 2022 comes to an end, the global economic environment remains challenging. The war in Ukraine has led to shortage of food, staples and energy. Though prices of food, energy and other commodities have eased moderately of late, high inflation is affecting economies across the world. IMF has projected that more than a third of the global economy will experience contraction this year or next year. However, the Indian economy has been resilient, drawing strength from domestic fundamentals. "Our financial system remains robust and stable. India is widely seen as a bright spot in an otherwise gloomy world," says Shaktikanta Das, governor, Reserve Bank of India. But he says the battle against inflation is not over. Thus, it is important to invest in products that can deliver higher than the inflation rate.

In 2022, equity as well as debt markets were volatile, both in India and abroad. The year 2023 is unlikely to be different as economic problems continue to trouble all major economies. The question is, how and where should one invest in such a chaotic environment? If equities remain under pressure, can one opt for traditional or alternative asset classes? Here's what one can expect from different asset classes in 2023.

On Strong Footing

A World Bank Report, "Navigating the Storm," says India's economy is relatively insulated from global shocks compared to other emerging markets. The report says while a 1% decline in growth in U.S. is associated with a 0.4% decline in India's growth rate, for other emerging economies, this number is around 1.5%. Analysis of growth rates of E.U. and China gives similar results. "India's economy has been remarkably resilient to the deteriorating external environment. Strong macroeconomic fundamentals have placed it in good stead compared to other emerging market economies," says Tano Kouame, World Bank's country director in India.

Indian stock markets are also less sensitive to Fed rate hikes, U.S. growth rates and foreign portfolio investor (FPI) selling due to strong domestic fund flows. While FPIs have pulled out a record $18.1 billion from Indian markets in 2022, domestic institutional investors have bought stocks worth $30 billion.

However, investors need to be vigilant due to adverse global developments, says World Bank's Kouame. The World Bank has forecast that the Indian economy will grow 6.9% in FY23 compared to the earlier projection of 6.5%. But a tough environment will affect the economic outlook, it adds.

If recession or other global events hit hard, it will be difficult for Indian markets to stay decoupled for long, says Srikanth Subramanian, CEO, Kotak Cherry.

Tough Equity Markets

BSE Sensex has risen 7% in 2022 due to domestic factors. Earnings and economic growth in last two quarters are keeping markets strong, says Srinivas Rao Ravuri, chief investment officer, PGIM India Mutual Fund. In FY23, Nifty50 companies have reported 15% profit growth, better than what was expected in view of supply chain bottlenecks and high commodity prices at the start of the year. India is placed better than other advanced and emerging economies, supported by government policies that are acting as tailwinds for growth in multiple sectors, says Anil Rego, founder and fund manager at Right Horizons, a Sebi-registered PMS provider. However, experts say one must be prepared for a likely slowdown.

"With macro uncertainty looming, one should not be leveraged or over-concentrated in any particular sector at these market levels. Markets will have phases of correction due to global macro headwinds," says Kotak Cherry's Subramanian.

Srinivas Rao Ravuri of PGIM India MF does not think the picture is rosy considering the way things are unfolding globally. "We are in midst of a major shift from global expansion of liquidity to tightening. This will have an impact across the globe. India cannot escape from that."

So, is it a good time to buy equities? Investors should remain cautious given the worries about U.S. slipping into recession, says Ram Kalyan Medury, founder and CEO of Jama Wealth, a Sebi-registered investment advisor. One must spread risk across asset classes and take advantage of sharp dips that the market may see from time to time, he says. Long-term monthly investments can continue, he adds.

Investors should remain cautious as equities rarely move one way. Investors should buy according to their risk appetite and have a longer time horizon. If someone is doing that, one can invest in equities even today, says Ravuri. For beginners, large companies are best as they are relatively stable with proven business models and operating cycles. Ravuri suggests a flexi-cap approach under which your portfolio has a mix of large, mid and small caps.

Global Opportunity Lost

International equities have gained traction over the years, particularly after the sharp rally in global stock markets post the Covid-19 outbreak in March-April 2020. International equities provide geographical diversification as well as opportunity to invest in new themes such as AI and robotics. However, in February this year, Sebi restricted Indian mutual funds that invest abroad from accepting fresh money after their combined global investments reached the regulatory limit of $7 billion. The aim was to prevent outflow of foreign exchange. While a few funds have again started accepting lumpsums after Sebi eased the rule after a few months, this may mean lost opportunity for Indian investors as U.S. stock market valuations are at reasonable levels due to sharp dip in 2022. NASDAQ 100, which mainly comprises technology and telecom stocks such as Alphabet, Apple, Microsoft and Meta, is down 30% in 2022. Some of these businesses appear attractively priced due to sharp dip, says Raunak Onkar, fund manager and head of research, PPFAS Mutual Fund. These are strong businesses with long runway of growth ahead of them, says Onkar, adding that for the time being, they are unable to increase investments in these businesses. "We are complying with the limit by not allocating new funds to international stocks." He manages foreign investments of Parag Parikh Flexi Cap Fund, one of the most consistent performers in its category. The scheme had to halve its international equity allocation to 16% (as on November 30) over last few months to comply with Sebi's overseas investment limit. "Since February 2022, any additional money investors have put in has been deployed in domestic stocks."

However, those looking at higher exposure to global stocks may directly buy stocks, exchange traded funds and international mutual funds by using the individual LRS (Liberalised Remittance Scheme) quota of $2,50,000 per year. Vested, a US Securities and Exchange Commission-registered investment adviser which helps Indians invest in U.S. stock markets, saw a 42% rise in trading volumes in 2022.

However, anyone looking to invest in global stocks directly must go through reputed entities but first do get a grip on how gains from global equities are taxed.

Debt Market: Good Days Ahead

With RBI on a rate hike spree to curb inflation, yields on short-to-medium duration bonds have touched 7-7.5%, which means bond funds are likely to do well over the coming two-three years. Pankaj Pathak, fund manager, Fixed Income, Quantum AMC, says investors with a two-three year investment horizon and some appetite for volatility can invest in dynamic bond funds in a staggered manner. These are open-ended schemes that invest across durations. "Dynamic funds give us flexibility to change the portfolio based on evolving conditions. There is a lot of uncertainty due to (Ukraine) war. And we are not sure whether inflation has peaked or not," says Pathak. We will probably get a better sense next year, he adds. Rate hikes and reduction of liquidity surplus are positive for short-term debt funds such as liquid funds, says Pathak. He expects further improvement as interest accrual on short-term debt papers has risen meaningfully. "Conservative investors or investors with shorter holding periods and low risk appetite should stick to liquid funds," he adds.

Dhawal Dalal, CIO, fixed Income, Edelweiss AMC, says this as an opportunity to invest in fixed income for the long term as headline inflation will fall gradually in FY24 and RBI will be done with rate hikes by March 2023. He says the terminal repo rate will settle between 6.25% and 6.5% by March 31 and there will be a long pause in FY24. This should result in benchmark 10-year government bond yields settling between 7% and 7.25% based on long-term averages, he says. "Investors seeking long-term fixed income allocation should use this opportunity to increase exposure to target maturity funds maturing in five to 10 years." Target maturity funds are passive debt instruments that invest in bonds maturing on or before the term of the scheme ends. They offer better visibility of returns.

However, Pathak of Quantum AMC cautions about inflation. Though headline numbers have start coming down due to base effect, he expects some risk from food inflation, especially cereals, whose prices have been rising more than 1% monthly on a sequential basis. "If the trend continues, market dynamics will change," says Pathak.

Real Estate Boom

The year 2022 was phenomenal for the real estate sector, particularly the residential segment, due to robust demand from end-users and low home loan rates, says Anuj Puri, chairman, ANAROCK Group. Latest ANAROCK data says sales will exceed 3.6 lakh units in 2022 (in 2014, the previous peak, 3.43 lakh units were sold). Housing demand will reach new peaks in the coming year, says Anil Pharande, chairman, Pharande Spaces and president, CREDAI, Pune-Metro. Millennials are driving this demand, and knowing what they want will be the key to doing well in residential real estate in 2023.

The Indian office market is not far behind. Sales have risen consistently since the second wave of the pandemic in Q2 of 2021. Volumes rose 29% to 1.24 million sq. mts. (16.1 million sq. ft.) in Q3 of 2022, says Vivek Rathi, director-Research, Knight Frank India. Notably, all markets, except Pune and Hyderabad, saw YoY growth in transaction volumes with Ahmedabad, Mumbai and Bengaluru growing 117%, 82% and 71%, respectively. Co-working spaces accounted for 23% transactions, says Rathi. "Co-working transaction volumes saw year-on-year growth of 380% in Q3 2022." Co-working players were particularly active in Bengaluru; the city accounted for 52% transactions by space. Demand for flexible workspaces is increasing as they enable companies to save costs, boost productivity, enhance work experience and provide flexibility to employees, says Manas Mehrotra, founder, 315Work Avenue, a co-working space provider.

Warehousing is also expected to see high growth as global supply chains shift from China to India due to Covid-19 disruptions in the middle kingdom. Global corporations are looking at China+1 strategy so that they are not overly dependent on any single manufacturing destination, says Vivek Rathi of Knight Frank India. While growing at a fast clip, the size of the Indian warehousing market is way smaller than what developed countries have been able to build. Warehousing transaction volumes in eight primary markets are estimated to grow at a compounded annual growth rate of 19% in the FY2021-2026 period, says Knight Frank.

You can also participate in real estate markets via fractional ownership where investors pool in funds to buy a property and then lease it out. The investors share the rent as well as capital gains if the property rises in value. You can buy such assets online. For buyers, we've created a new terminology called laptop landlords, says Sudarshan Lodha, founder and CEO of Strata, a real estate investment company. Fractional ownership allows a person to buy stakes in multiple properties and diversify across, say, office, warehousing and hospital assets. Yields can be between 7-9%. Fractional ownership is a ₹2,000 crore market. Lodha expects it to touch ₹6,000 crore in one year.

Positive On Gold

Our medium to long-term view on gold remains bullish, says Chirag Mehta, CIO, Quantum AMC. But he expects short-term volatility because of global recession worries. Experts say a combination of recession forcing Fed to lower rates, somewhat elevated inflation and geopolitical uncertainties driven by Russia-Ukraine war will benefit gold. "Gold has performed better than risk assets during such periods," he adds. The yellow metal has risen 10% to ₹55,600 per 10 grams year to date. However, it is still below its all-time high of ₹57,000 per 10 grams touched in August 2020. Mehta recommends at least 15% allocation to gold. "If we look at the peak of $2,070 an ounce in March 2022, gold is available at 15% less than its all-time high price. Therefore, accumulating gold at these levels in a staggered manner will help you build a resilient portfolio that can withstand drawdown in equities due to global recession and resulting risk aversion," says Mehta.

New-age investors looking for innovative products may also look at peer-to-peer lending platforms which eliminate intermediaries such as banks. P2P lending has emerged as an alternative asset that helps investors earn more than conventional fixed-income while staying non-market-linked, says Bhavin Patel, co-founder and CEO, LenDenClub. Low minimum investment means investors can diversify by lending to a vast pool of borrowers and reduce risk.

The Crypto Game

Cryptocurrency, the hottest next-gen investment, has had a tumultuous year. The largest cryptocurrency, bitcoin, has fallen around 75% from November 2021 to $17,000. It is down 63% year to date. Shivam Thakral, CEO of BuyUcoin, says even after this sharp correction, bitcoin's daily volumes have remained consistent throughout the year. "In 2023, we expect favourable macroeconomic conditions as central banks have hinted at relaxation of monetary policies and interest rates. Inflation will be a key factor in deciding the fate of financial markets across the globe. The crypto market will overcome the collapse of crypto giants like FTX and move towards a more mature phase with wiser investors and healthy regulations." However, if you can't bear the risk of losing all your money, this space is not for you. Nikhil Kamath, co-founder of the biggest stock broking platform in the country, Zerodha, says he has never figured out how to research this asset class. There are no parameters to fundamentally analyse them, he adds. "If I am looking at Infosys (stock), I am looking at what earnings my share will earn next year and at what rate are those earnings going up. The same does not exist in crypto, hence I find it hard to analyse." Crypto players are wishing for a regulatory framework in the coming year.

Clearly, 2023 is not the year for swashbuckling! Your investment decisions depend on risk profile, your goals and time to achieve those goals. It's not a year to get into very risky assets due to uncertainty surrounding the global economy. Nor should investors fall prey to FOMO or take any shortcut to make a quick buck. Stick to asset allocation, stay disciplined and let the power of compounding work for you.

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