While the year 2022 kickstarted on a very optimistic note, the turn of events reversed the upbeatsentiments towards the close of the year. While markets are presently dealing with many uncertainties, data suggests that pockets of opportunities exist, and need to be unraveled.
The bygone year & Expected trends in 2023
The key trends witnessed in 2022 were 1) Uptrend in investment,2) K shaped recovery – divergence in rural and urban demand, 3) Thrust on manufacturing and 4) Easing of supply chain pressures. Going forward, the key trends to watch out for in 2023 are 1) Focus on renewable energy, 2) Relative asset class attractiveness and 3) Growth divergence between India and developed markets.
Equity Market Outlook
Inflation and growth slowdown especially in major economies – US, Europe, and China – remain key areas of concern which will continue to influence global growth. Domestically, 2023 could be better than 2022 given factors including (i) ongoing recovery in domestic consumption demand, (ii) supply side measures to revive private sector capex, (iii) stronger balance sheets of corporates and banks (iv) the likelihood of global recovery expected in second half.
Sentiment will be guarded, and investors could likely seek to invest in businesses with strong balance sheets and sound business models, at least until a genuine global economic recovery takes shape. Cheaper valuations could bode well for long-term investments in equities. It is recommended to consider staggered investment in diversified fund categories.
Fixed Income Market Outlook
The RBI is expected to take a pause after a 25 bps rate hike in the next meeting in February and the terminal rates could be around 6.50%. From a long-term perspective, the overall supply side requirements remain cumbersome and the fiscal deficit, although on a consolidation path, will continue to stay high. As the next fiscal year would be the year before the general elections, some pressure on government finances may be expected which could likely exert pressure on the long end of the yield curve.
With rates likely to peak, we prefer to consider short/ intermediate maturity segments while identifying tactical opportunities in the longer maturity segment. Investors with greater appetite for volatility may consider medium to long duration categories with high quality portfolios. Investors who prefer to hedge against a rise in interest rates may continue to consider shorter maturity funds and floating rate funds.