Data Insights: Market Outlook for 2023 and a bit more - 8th Jan'23
All views are personal and for educational purposes only, please do your own research before investing and trading
Hi,
A happy new year!
With a new year, the first thought after “I need to hit the gym and get abs for sure this year” is “where do I invest this year, will markets crash?”
So, sit back, here are some colourful charts full of data and small paragraph of analysis to arm you with some good food for thought!
NIFTY Historical Returns
Considering the past 22 years, we are on the longest streak of NIFTY 50 returns with 7 continuous years of positive returns.
Now while this streak could continue, it is important to be aware of this data point.
Mcap Indices Performance During Down Years
During the 3 down years, in 2 of them NIFTY 50, i.e., the large cap index performed better than the Midcap and Smallcap indices.
This also makes sense logically seeing as larger companies would relatively be less affected during times of downturns.
Hence, it might make sense to have a larger large-cap allocation in the equity component of a portfolio if one is expecting a downturn.
Inflation
India’s inflation after a spike during the last year is back in the RBI’s range, if this sustains, we could see a pause in the rate hikes.
Bond Yields
The 10Y yield, although higher on account of interest rates hikes for the year, has overall seen a downtrend since June’22
The yield curve, as compared to 6M ago, has become flatter with a spike in short-term yields while long term yields have marginally declined in the same period.
While we do not have an inverted yield curve, the flattening of the curve is still could be a negative sign for the economy.
NIFTY
NIFTY was on an overall uptrend in the latter half of 2022, however after making a 52-week high, it broke away from the trend and is currently heading downwards.
Comparing current NIFTY P/B values with the average P/B value over the decade shows signs of over-valuation, with NIFTY P/B hovering around the upper limit of the 95% confidence interval.
Putting it together
Okay, we have talked about:
Historical NIFTY returns
How mcap indices perform during downturns
Some economic indicators
Current NIFTY trend and it’s P/B
But what does it boil down to?
Let us start off with inflation which seems to be coming into control; the downward trend it would allow the central bank to not feel the need to hike the rates further, this could be positive for bond prices.
The flattening yield curve is a cause of concern though, and could signal an impending recession, which is negative point for equity.
The fact that we are on the 7th consecutive year of positive returns and the NIFTY P/B values have deviated far away from the average and are around the upper limit of the confidence interval also shows signs of concern for equity prices.
If equities were to underperform, chances are the large caps would suffer the least.
What does it mean for me?
“I get it, equity seems to be on a bad path this year, and debt would do well”
Nobody really knows if equity would do bad this year, it could certainly be in trouble and there is a good chance in my opinion of bonds outperforming equity, but it doesn’t mean we rush to another asset class.
Moreover, chances are your equity component still is a small % of your portfolio or your portfolio is still in the accumulation stage, especially if you started SIPs <5Y ago.
Now think about it:
If equities underperform: If my portfolio is anyway small, if I continue my SIPs, all I’d do is accumulate a lot of units this year, which could be a very advantageous thing to do for my wealth creation.
If equities outperform: I’d not have to feel the regret of not investing in them
So, the key take-away would be well, to continue those SIPs, and not stop them as well as to not switch whatever little equity you might have to debt – incurring costs and taxes in the process for a chance event, especially if you’re invested for the long term via mutual funds.
However, this does not mean the analysis that equities might underperform is useless:
It might be a good idea to be more exposed to large caps than small caps, especially if one is risk averse, so perhaps going forward the SIPs can be more towards index funds instead of individual midcap or small cap funds / stocks.
Another view could be that since Mid and Small Caps do arguably worse during downturns, if the downturn does come, SIPs into Midcaps could be useful since one can pick them up at low cost.
Combining the two, perhaps a large-midcap fund which are funds that invests in large and mid-cap stocks could be a type of fund to look into?
One another aspect to look into is, if one is overexposed to equities or might want to invest in debt for a short-term goal or perhaps want to lock in a rate, this could be a good time to do so, especially since short-term yields and long-term yields are both pretty decent.
Infact, if you have been putting off making an emergency fund for a while now, building one up now with some money-market funds might be a smart decision.
Overall, the point is, equities can underperform from time to time.
However, you got to stick to your asset allocation, take advantages of those downfalls alongside sticking to your plan.
We need to remember that half the reason why equities are able to perform well is because of the fact that one can accumulate it during periods of downfall and then make a good return when it shoots back up.
I remember when I used to cook as a kid, I had a constant habit of stirring the pot while making Rajma (kidney beans) or literally anything else, which well, didn’t help since it increased the cooking time; learnt keeping the pot as is and just ensuring you’ve added everything makes more sense, with a little stir here and there would help me make my dish faster with less effort all while saving gas and time.
On that thought, until next time, keep manifesting wealth.
Disclaimer: All above views are purely for educational purposes and are not to be taken as investment advice. Investment or trades taken of any kind based on this are solely the person’s risk and I bear no liability. Please consult a financial advisor before making any investments. All investments are subject to market risks.
Website: Manifestwealth.in
Twitter: @Manifest_W
LinkedIn: Manifest Wealth
Sources:
Trading Economics
Trading View
Investing.com
Google Images
NSE