Time to diversify to global equities as central banks frontload rate hikes?

Though the recent rally in domestic equities has turned the markets expensive relative to peers, analysts still suggest investors focus on Indian equity markets

Global equity markets have had a roller coaster ride thus far in calendar year 2022 (CY22). Investors have been risk averse in the backdrop of rising inflation and have been 'selling the rallies', amid fears that inflation and growth trajectory remains uncertain, and there could be more volatility ahead for the markets.

Given this, should investors look inwards and invest in Indian markets, or is the nervousness across global equities a good time to diversify into international markets? Most analysts say the risk-reward for investing in Indian equities remains favourable despite the global headwinds and investors should use a correction/fall, if any, to accumulate stocks from a medium-to-long term perspective.

"Global markets are in a situation of flux. It has become very complicated to guess what the market is saying. The additional considerations to the usual metrics are disruptions – existing and potential, due to the war and quantitative tightening, which are leading to higher inflation and interest rates all over the world. In this fraught environment, India is well positioned," said Vineet Bagri, managing partner at TrustPlutus Wealth India.

Thus far in 2022, key global indices including Dow Jones, S&P500, Nikkei, Kospi, Heng Seng, and MOEX Russia have tumbled in the range of 4 per cent to 36 per cent. In comparison, the S&P BSE Sensex and the Nifty50 have remained resilient and gained 1.5 per cent each during this period, data show.

Meanwhile, India's retail inflation climbed to 7 per cent in August – staying above the Reserve Bank of India's (RBI's) target zone for the first eight months of 2022. However, the levels are not as high as being seen in developed countries, which is keeping analysts bullish on the country's growth outlook.

"India's GDP growth number reflects a resilient, and robust economy compared to any of the comparable economies in the emerging markets’ space. The credit growth at over 15 per cent is another sign of improving business conditions. The manufacturing sector is expected to perform well in the light of spends by companies, and the various initiatives by the government, and also due to the opportunities presented by China plus one," said Joseph Thomas, head of research at Emkay Wealth Management.

Though the recent rally in domestic equities has turned the markets expensive relative to peers, analysts still suggest investors focus on domestic equities for now.

"Indian market's valuations are expensive at 23x trailing, and 18x FY24 expectations. India has also outperformed the S&P by 6-7 per cent over one year, and MSCI EM Index by 21 per cent in the same period. So, there are no great choices. Still, if one had to incrementally allocate, we would advise investing domestically rather than internationally right now," said Bagri of TrustPlutus Wealth India.

Another factor that has reposed faith in Indian equities is the return of foreign institutional investors (FIIs) in the last few months. After a brutal sell-off by them that saw nearly $30 billion being withdrawn from the Indian equity markets between October 2021 and June 2022, FII flows have started to trickle in, which analysts said is a sign of their belief in Indian equities.

Since July 2022, they have invested a net $ 8.14 billion (Rs 64,800 crore). Retail investor flow into equities has been resilient all this while and has helped Indian frontline indices outperform global peers. This, analysts believe, is likely to continue.

"Global pain in the form of recession / deflationary conditions would help India to gain in the form of cheap oil and moderation in both trade deficits and inflation in the near future. Hence, we continue to believe that the domestic markets would recover significantly after every major fall in the short-term and the Sensex would hit another record high level by end of CY22," G Chokkalingam, founder and chief investment officer at Equinomics Research said.