Volatile market: Motilal Oswal explains how to invest in equity, debt, gold

The recent Budget provided a fillip to Multi Asset Allocation funds, which invest in equity, debt and gold, and should be considered as a superior alternative to traditional fixed income

The wealth management arm of Motilal Oswal has advised investors to adopt a disciplined approach to their investment strategy in light of the recent policy shift by the Bank of Japan, and potential economic slowdown in the US. 

Motilal Oswal Private Wealth recommends a staggered investment approach for both large and multi-cap strategies over a six-month period. For mid and small-cap funds, the investment horizon should be extended to 6-12 months.

In the fixed-income space, the firm suggests a duration bias to capitalize on potential yield softening. Investors are advised to allocate 30% of their fixed income portfolio to actively and passively managed debt strategies, while another 30-35% should be invested in multi-asset allocation funds and equity savings funds. 

To enhance portfolio yield, 30-35% can be allocated to private credit strategies, REITs, InvITs, and select high-yield NCDs.

The report also highlights the potential of precious metals, particularly silver, as a hedge against market volatility. 

According to Alpha Strategist August 2024 report by Motilal Oswal Private Wealth, The recent rate hike by Bank of Japan has led to heightened volatility in risk assets. 

A 'carry trade' occurs when investors borrow money in a country where interest rates are extremely low and invest that money, after converting the currency, in a country where interest rates are relatively much higher. To combat deflation, the Bank of Japan (BoJ) kept the country's interest rate at zero for almost a decade. This influenced global investors to borrow in Japanese Yen and invest in risk assets like equity denominated in USD and other global currencies, hence the term – Yen Carry Trade. With inflation rising, the BoJ recently hiked rates to 0.25%, which led to some unwinding of the yen carry trade causing high volatility in global equity markets. Couple this with recent data from the US which indicates slowdown in the labour market, fuelling concerns of a recession. Market participants now expect the US Fed to commence cutting interest rates from Sep'24 onwards.

"Despite these global events, India continues to remain a bright spot and is expected to be the fastest growing major economy this year. Corporate earnings growth over the last five years has been stellar and this has been the primary driver of equity market performance. For the top 500 listed companies, (Nifty500), the profit after tax  growth between FY19-24 was 22%, and the total market cap of these companies has grown at the same rate during this period. Earnings growth is expected to moderate going forward.

In terms of valuations using Price to Earnings (PE), Large Caps are in fair valuation while Mid & Small caps on aggregate are relatively expensive. MOPW suggests adopting a staggered investment approach over 6 months for Large cap & Multicap strategies. For select Mid & Small cap strategies, investments should be staggered over the next 6-12 months," said the report. 

Equity Strategy

• MOPW believes a combination of 7% GDP growth and 15% Nifty earnings CAGR in FY24-26, stable currency, moderating inflation, and buoyant retail participation may keep sentiments strong. 
• However, valuations appear fair for Nifty-50 and expensive for mid/small caps. 
• Valuations for Nifty remain near its LPA at 21x one-year forward earnings. 
• Industrials and Capex, Consumer Discretionary & Real Estate would continue to be in focus. 
• Based on their risk profile, investors which the appropriate level of equity allocation can continue to remain invested. 
• If equity allocation is lower than desired levels, investors can increase allocation by implementing a staggered investment strategy over 6 months for large & multi-cap strategies and 6 to 12 months for select mid & small-cap strategies with accelerated deployment in the event of a meaningful correction

Fixed Income Portfolio Strategy

MOPW reiterates their view to have a duration bias in the fixed income portfolio so as to capitalize on the likely softening of yields in the next 1-2 years

• 30% of the portfolio should be invested in Actively & Passively managed debt strategies to capitalize on duration
• 30% - 35% of the portfolio should be allocated to Multi Asset Allocation funds & Equity Savings Funds.  These funds aim to generate enhanced returns than traditional fixed income with moderate volatility through a combination of Domestic Equity, Arbitrage, Fixed income, International Equity, Gold & other Commodities
• To improve the overall portfolio yield, 30% – 35% of the overall fixed income portfolio can be allocated to Private Credit strategies, REITs/InvITs & select high yield NCDs
• For Liquidity Management, investments can be made in Floating Rate & Arbitrage Funds.

Silver

Demand & Supply

In the last three years there has been a deficit (demand exceeding supply) for silver which supported the prices. The trend for industrial demand for silver is increasing since 2020 and has reached at all highs.

Outlook

As per MOFSL research, Silver has a strong demand outlook based on the following reasons:

• Industrial demand boost

• Boost in Manufacturing and Industrial activity in China

• Potential for pickup in Green tech

Gold

Gold is an important asset class during times of heightened volatility and should be considered for strategic portfolio allocation. Recommendations include Sovereign Gold Bonds, Gold ETF/FoF.