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Rupeeting Monthly Performance Update - February 2022

February 2022 was a tough month. Markets globally fell because of high inflation, and the Russia-Ukraine conflict. There was a general movement towards safety seen across the globe. This increase in risk aversion determined movement in most asset classes through the month.

The markets in February 2022

Stocks: Equity markets took a hit in February. While the large caps were down 3% this month, mid and small caps saw a larger downfall.

Debt: Debt markets were however stable as investors moved from risky and volatile assets like equities into safer ones like government and corporate bonds.

Gold: With the run for safety, gold performed very well in February 2022. Gold was up a good 6% with this flight for safety.

International stocks: The factors of inflation and geopolitical stress affected equities globally. The Nasdaq too, just like Indian equities was down this month.

Why did the markets fall in February?

For one, high inflation in the US has been a worry since a bit. High inflation is likely to result in the Fed increasing interest rates. That would make global investors move some money from risky markets like India, into safer instruments like US debt, which will then offer higher interest rates for lower risk. That liquidity flow is likely to hurt the Indian markets. For more on this:

Furthermore, the Russia-Ukraine possibility of conflict just got real when Russia sent troops into Ukraine. The markets don’t take geopolitical tensions, especially when a large global economy is involved very well. Plus, Russia being a large exporter of oil, gas and wheat sparked a rise in the prices of these commodities, further scaring the markets on inflation. For more on this:

There was a general run to safety seen in the markets globally. Hence, mid and small caps did worse than large caps. Debt was stable as investors moved from equity to debt. Gold, which is looked at as a safe asset was up 6% this month. For more on this:

Rupeeting in February

During the month our Core Portfolios, which are all-weather portfolios made of 5 different asset classes, performed very well - they all outperformed the Nifty 50.

Some of our decisions in the last rebalance helped us gain this advantage:

  1. We moved from mid caps to large caps

  2. We added corporate bonds to the portfolio, which gave us a better yield

  3. We maintained exposure to Gold, which performed well

Some decisions that didn’t work too well were:

  1. Maintaining the overall exposure to equities in general - lesser exposure would have helped us further cut losses

  2. Maintaining the exposure to Nasdaq, which was down both in January and February - lesser exposure here too would have helped

On the other hand, equity portfolios obviously faced the heat of the markets going down. Those with larger exposure to mid and small caps took a heavier beating than the broader markets did; whereas, those with >50% exposure to large caps did better than the markets.

Moreover, internet stocks have been thrashed post their fancy listings. The primary reason again being overall market conditions. This has been a trend globally as investors move from risky assets to less-risky ones. In this scenario, they tend to step out of companies with high valuations and lesser visibility on earnings to established companies, defensive sectors and value plays. For more on this:

Despite the near-term hit, our approach on stock selection in any of the portfolios is always based on strong fundamental analysis, in-depth research and years of experience. We are confident of maintaining the outperformance that we have exhibited over the last many years. Our goal as always is to outperform the markets over the long run and create wealth over years.

What next for the markets?

We continue to be of the opinion that short term volatility will continue as long uncertainty is high. The markets are likely to react negatively on any adverse developments on inflation or on geopolitical stress. However, the equity markets tend to overcome these factors, and outperform other asset classes in the long run.

Until, then, it is optimum to diversify portfolios to reduce the overall risk, and to generally skew portfolios to less risky assets. This could mean more exposure to large caps, value plays, defensive sectors, stocks relatively shielded from inflationary pressures, debt, and safe assets like gold.

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