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Rupeeting Core Rebalance - October 2022

What started off as concerns at the beginning of the year have snowballed into major problems as we head towards the end of the year.

  • The Russia-Ukraine crisis has reached upped the escalation game

  • Inflation continues to remain high and sticky

  • The US job market refuses to cool down

  • The situation in Europe is worsening with the Russian gas cut-off, and winter approaching

  • Central banks globally are synchronised on aggressive rate hikes to cool economies down

  • Recession projections for 2023 are getting more real by the day

  • England was on the brink of a financial crisis thanks to misplaced fiscal priorities

  • China is battling its own housing crisis and COVID-related issues

The markets obviously have been facing a heightened share of volatility, and downturn. With increased risks, we are trimming our position in equities, and increasing exposure to debt.


With this rebalance, we’re nearing the lower end of our range for risky-asset exposure in our portfolios. We have the ability to go a notch lower, but we’d do that if we see the markets worsening further.


RISK PROFILE

RISK-SAFETY SPLIT (OLD)

RISK-SAFETY SPLIT (NEW)

Aggressive

75-25

67-34

Balanced

57-43

49-52

Conservative

24-77

15-85


What are we changing?

We are cutting down on equity and adding on to debt

Due to increased uncertainty and risks, we are cutting down on our equity exposure, and adding more debt across portfolios.



Maintaining stance within equity and debt

  • Within equity, we continue to favour large caps over mid-caps. In volatile and uncertain times, we prefer sticking around with large caps to cap downside. We continue to have a 3:1 split between large and mid-caps. Small caps are still an avoid for us.

  • With debt, we are maintaining our 50:50 split between the government and corporate bonds. We are also happy with the fact that we reduced the maturity of our debt exposure at the beginning of the year. We had moved from 10 years of government bonds to 5 years. And also added 5-year maturity AAA corporate bonds. We continue to favour shorter-term bonds in the rising rate scenario.

What next?

We see a risk on equities despite India being the fastest-growing economy globally. Global downturns are bound to impact India, and we see a worsening situation opening up downside risk in the Indian markets.


To add to this, India is currently also one of the most expensive markets globally. MSCI India is trading at a 130% premium to the MSCI Emerging Market Index, whereas the historical premium has been 60%.


Moreover, aggressive rate hikes in the West put a threat on further depreciation of the INR, which can hurt India’s fiscal deficit, prompt rate hikes in India, and consequently slow the Indian economy down.


💡 That said, minus the global turmoil, we are positive about the India story. We would see these dips in the markets as an opportunity to buy with a long-term horizon.


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