ETMarkets Smart Talk: Want to deploy Rs 10 lakh post fall? Here’s a guide for high-risk & risk-averse investors

Bears took control of D-Street pushing benchmark indices to crucial support levels. How long will the volatility likely to continue?

We expect the volatility to stay in the markets for the short term as the central banks tighten the money supply. But, the Reserve Bank of India (RBI) and the US Federal Reserve are only looking to raise 1-1.5% from current levels in an accelerated fashion, and this means that the cycles will be over soon, and the focus will return to growth as the hike cycles are done.

Hence, our medium to long-term view remains positive, and we see the year’s second half going much better than the first half.

Encouraging data from MF in May and SIP flows are increased marginally which is a positive sign, but at the same time redemptions are also happening. But, do you foresee more funds getting allocated towards fixed income vs equities?

The rise in SIPs is encouraging both for MFs and direct stock investing. Investors recognize that instead of panic-selling or bottom-fishing, one can start a SIP in volatile times to lower the buying prices.

This maturity in the Indian retail investor is encouraging. But yes, equities are getting more volatile than fixed income, but rising rates also have an inverse relationship with bond prices, and shorter duration bonds are most affected.

The fixed-income funds have seen a sell-off for the same reason after each rate hike. We see allocations shifting towards balanced funds rather than across asset classes.

If someone plan to put Rs 10 lakh now – which is the ideal medium. What is the ideal asset allocation strategy?
The asset allocation recommended would vary across risk profiles. I would encourage long-term investors with a high-risk appetite to bet on equities as we see the pain subsiding in the medium to long term.

A high-risk investor could have a 15% fixed income allocation along with equities. A medium-risk investor can work with 25-30% allocation to fixed income and bonds, while a conservative investor can look at 50-60% fixed income allocation.

Do you think FDs will now become more popular at least for the risk-averse investor in light of the rising interest rate scenario?
FDs will see a direct impact of rising rates as the banks eventually raise interest rates on FDs after the RBI move. As a result, risk-averse investors or treasuries could see FDs look more attractive than liquid funds.

This would be a positive for the banks, who could capitalize on this once growth comes back to the economy.

We saw the rupee hitting a record low in June – which stocks or sectors are likely to benefit the most from the surge?
The sectors that gain when the rupee tumbles are those that export or those that have their businesses running in global locations and earn their revenue in dollars.

The IT sector should be the biggest beneficiary of a falling rupee. Still, this time the global tech companies that drive IT revenue is also falling, dampening the sentiment in his sector.

The other industry that is gaining with a falling rupee is Pharma which exports 50% of its products. However, the gain could be delayed in this sector as exporters generally hedge currency exposure for the short term.

Crude oil is also hovering around $120/bbl – which might not put India in a comfortable scenario if it holds around this level. How will it impact the economy, as well as valuations?
The high crude oil price causes heightened inflation at alarming levels. The increased inflation could aggravate deficits (CAD, trade, fiscal) at a higher rate and dampen the growth sentiment.

Moreover, the unstable economic outlook lowers the valuation expectations for Indian companies, and the FIIs could remain shy of returning to India.

Traditionally dollar and crude have moved in opposite directions, but this time both dollar and crude are rising, causing a double whammy on the Indian economy.

The impact of a 20% rise in brent prices is 40% for India as the currency has also depleted.

With rising interest rates, do you think it would dent valuations?
The rise in interest rates does make getting credit more challenging in the economy. Still, at this time of high inflation, currency depreciation, and high crude prices, the rise in interest rates strengthens sentiment as it provides the confidence that the economy will not be let go out of whack.

The interest rate hike could slow the pace at which valuations have been falling at this time, in my opinion.

FII selloff in India is part of larger global selloff. When will FIIs reverse the trend and dos that mean that FII heavy stocks where they have a double-digit stake could remain under pressure?We see the FII return to India in the medium to long term. The triggers for the reversal would be an easing in inflation, the end of the rate hike cycle, or the conclusion of tensions in Ukraine.

We have already seen the FII stake in Indian companies come down to the lowest levels, and we do not see a sharper pain ahead. Stocks with heavy FII holdings can only face trouble if another sharp sell-off happens, which is improbable.

There are plenty of stocks trading at double-digit discounts compared to their 52-week highs. What is the right strategy to be followed when buying a falling knife?
We think SIP is the answer. Of course, no one can predict the bottom. We recommend that investors do not try to buy the dip but doing a SIP in volatile times is a mathematical reason to be a profitable strategy as you get a lower buying price.

A balanced fund or allocation at this point would make more sense than all-in or all-out.