Axis Bank suggests this investment strategy for the remainder of 2023

The global bond markets are going through a rough patch. US yields hit a fresh 16-year high after a bond selloff amid growing concerns on hawkish policy comments and interest rates which are likely to remain elevated for a longer period of time. This will in turn lead to a spike in bond yields and the slowdown in global economic growth, which will also keep the investors cautious, Axis Bank noted in a report.

The much-awaited inclusion of Indian government bonds in the JP Morgan Index was announced in September. However, the near-term impact has been muted as markets continue to remain resilient considering external market dynamics, it added.

During the September quarter, midcaps and smallcaps outperformed their larger counterparts by a notable margin. Moreover, in the last one month, sector rotation was clearly visible in the market in which PSU banks, energy, and commodity indices delivered the highest returns while the media index was in the red.

Short and medium-term strategy & outlook

Axis Bank remains constructive on the short to medium end of the yield curve. Short duration funds, banking & PSU debt funds, corporate bond funds, debt index funds (target maturities), medium duration funds, floating rate funds, money market funds, low duration funds and ultra short duration funds can be considered by investors with an investment horizon commensurate with the maturity profile of the schemes, it advised.

Moreover, investors can also consider investing in medium/long duration funds as per their risk appetite with an investment horizon of at least 2-3 years to avoid any intermittent volatility, it suggested. One should also consider aspects such as exit load, capital gains tax and asset allocation amongst others while evaluating their investment options, cautioned the lender.

Positive near-term outlook: Domestic-oriented themes, telecom, auto, domestic cyclical

Improving outlook: BFSI, industrials, PSUs, rural themes

Mixed bag: Export-oriented themes, pharma, discretionary & IT

Near-term challenging but well-placed for longer time horizons: Metals, commodity-linked stocks, and selective cyclicals (cement).

It also believes that macroeconomic developments and Q2FY24 earnings will continue to drive the market direction moving forward; and expects the market to remain volatile in the near future as the election calendar will kick off in Nov-Dec’23 with four big state elections, which will then set the stage for the General Elections of 2024.

“We believe that macroeconomic developments will continue to drive the market direction moving forward and the critical near-term monitorables will be (a) the Direction of Oil, (b) The Dollar Index, (c) US Bond yields, (d) The RBI MPC, and (e) Festive demand in rural and urban areas. Q2FY24 is likely to be a mixed quarter as the Indian economy has witnessed uneven rainfalls, which could impact domestic demand. However, the outlook for H2FY24 and the festive demand remains bright,” it stated.

As current valuations offer a limited scope of further expansion, an increase in corporate earnings will be the primary factor that would drive the market returns moving forward. Moreover, the margin of safety at current levels in certain pockets has reduced as compared to largecaps. Keeping this in view, the broader market may see some time correction in the near term and flows will likely shift to largecap, it predicts.

Asset allocation

While the leadership in the asset classes keeps on changing in different market cycles, gold has emerged as the best-performing asset class in CY2022 led by geopolitical concerns and a volatile equity & debt market, noted Axis Bank.

On a YTD basis, the Indian market has significantly outperformed the EM market, and the broader market has proven to be the best-performing asset class. However, equity as an asset class has emerged as the best-performing asset class in this quarter primarily due to positive flows in the emerging market, it mentioned.

It assumes the majority of the FY24 returns are front-loaded and hence the style and sector rotation will play a critical role in H2FY24 for alpha generation and that volatility is likely to continue for some more time before it concludes on a concrete trend. Asset allocation and sector rotation will be the keys to generating outperformance in 2023. Investors should focus on asset allocation and take advantage of volatility to build long-term positions, it suggested.

Long term

It continues to remain constructive on equities over the long term (3 to 5 years and above); however, volatility is expected to remain in the near term.

Given that, India’s healthy economic and earnings recovery coupled with a capital expenditure cycle, is expected to keep domestic markets attractive over the medium to long term. It maintains a positive bias towards Indian equity markets. Investors can consider investing in equities with a 3 to 5-year investment perspective.

Things to watch out for

“The market pricing indicates limited scope for rate cuts in the near future based upon the prices of interest rate swaps with the announcement of bond sales by the RBI at exacerbating levels. The shift away from action-oriented language indicates risks of a near-term hike are now out.

However, the focus on financial stability while linking this to inflation, sets the stage for higher-for-longer rates domestically, which is commensurate with trends seen globally. We expect yields to continue to remain volatile in the near term and oscillate in a tight range. Liquidity conditions are expected to remain tight, which is likely to keep interest rates at the shorter end high while the longer end may be anchored,” said the brokerage.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.

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Updated: 23 Oct 2023, 03:04 PM IST