‘The Way of the Samurai’: Motilal Oswal Private Wealth recommends THIS investment strategy to follow now

The recent rate hike by the Bank of Japan, coupled with U.S. economic data, has triggered increased volatility in risk assets. During such turbulent times, investors should adhere to ‘The Way of the Samurai’—a philosophy rooted in maintaining discipline, adhering to an Investment Charter, and following a well-defined asset allocation and deployment strategy, advised Motilal Oswal Private Wealth (MOPW) in its latest Alpha Strategist report. 

This disciplined approach is crucial for achieving long-term wealth creation amidst market fluctuations, it said.

The brokerage informed that in a country where interest rates are significantly higher, a ‘carry trade’ involves investors borrowing funds in a country with extremely low-interest rates and investing those funds, after currency conversion.

The Bank of Japan (BoJ) maintained Japan’s interest rate at zero for nearly a decade to combat deflation, prompting global investors to borrow in Japanese Yen and invest in risk assets like equities denominated in the US dollar and other global currencies—a strategy known as the Yen Carry Trade. Recently, as inflation surged, the BoJ raised rates to 0.25 percent, leading to a partial unwinding of the yen carry trade, which in turn triggered increased volatility in global equity markets. 

This situation has been compounded by recent U.S. economic data indicating a slowdown in the labor market, heightening fears of a recession. As a result, market participants now anticipate that the U.S. Federal Reserve may begin cutting interest rates from September 2024 onwards, explained the brokerage.

Impact on Indian Equities

Despite global challenges, MOPW noted, that India remains a bright spot, poised to be the fastest-growing major economy this year. Over the past five years, corporate earnings have been exceptional, driving equity market performance. For the top 500 listed companies (Nifty500), PAT (Profit After Tax) growth between FY19 and FY24 was 22 percent, with the total market cap of these companies growing at a similar rate, it highlighted. However, going ahead, it expects the earnings growth to moderate in the future.

In terms of valuations, largecaps are fairly valued based on the Price to Earnings (PE) ratio, while mid & smallcaps appear relatively expensive on aggregate, emphasised the brokerage. MOPW recommends a staggered investment approach over six months for largecap and multicap strategies. For select mid & smallcap strategies, it suggests staggering investments over the next 6-12 months.

Equity Strategy

The brokerage also noted that the markets are reaching new highs, and the recent budget has further strengthened India’s macroeconomic and microeconomic positioning, especially amid a fragile global economy. With GDP growth projected at 7 percent and Nifty earnings expected to grow at a compound annual growth rate (CAGR) of approximately 15 percent in FY24-26, along with a stable currency, moderating inflation, and strong retail participation, market sentiment is likely to remain positive. However, while Nifty-50 valuations appear fair at around 21x one-year forward earnings, mid and smallcaps seem overvalued, it said.

It expects sectors like Industrials and Capex, Consumer Discretionary, and Real Estate to continue being in focus. Investors with appropriate equity allocations can maintain their positions. For those with lower equity exposure, a staggered investment strategy is advised—spreading investments over 6 months for large and multi-cap strategies and over 6-12 months for select mid and small-cap strategies. Accelerated deployment can be considered in case of a significant market correction, suggested the brokerage.

Fixed Income

In the fixed income market, favorable demand-supply dynamics and well-contained inflation have led to a gradual steepening of the yield curve, stated MOPW. Currently, debt securities with 1-3 year maturities are yielding less than those with 10-year or longer maturities. The Reserve Bank of India (RBI) is expected to maintain its current interest rates this year, closely monitoring actions by the US Federal Reserve, it pointed out.

Furthermore, the recent Budget has boosted Multi Asset Allocation funds, which invest in equity, debt, and gold, making them a superior alternative to traditional fixed income investments. The brokerage continues to recommend a duration bias in fixed income portfolios to take advantage of the anticipated softening of yields over the next 1-2 years. For incremental investments in fixed income portfolios, MOPW recommends allocating 30 percent to actively and passively managed duration funds, 30-35 percent to conservative Multi Asset Allocation funds, and 30-35 percent to a mix of Private Credit strategies, REITs, InVITs, and select high-yield NCDs. For managing liquidity, investments can be made in Floating Rate and Arbitrage Funds. These funds provide flexibility and can help optimise liquidity in the portfolio, it added.

In the face of global economic uncertainties, MOPW remains optimistic about India’s economic prospects, urging investors to maintain a disciplined approach across both equity and fixed income strategies. While recognising the challenges posed by global market volatility, the brokerage underscores the need for staggered investments, particularly in large, multi-cap, and select mid and small-cap strategies, alongside a duration bias in fixed income portfolios. By adhering to a carefully structured investment plan, investors can navigate market fluctuations and capitalise on emerging opportunities for sustained wealth creation.

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