The current market scenario is bit confusing, on one hand we are seeing proper opening up of an Economy While the domestic demand is strong at an aggregate level. At the same time Inflation is a genuine concern both globally and locally. Stock markets world over seen volatility due to concerns about interest rate hikes, volatility in crude, and uncertainty regarding geo-political tensions between Russia and Ukraine
But Financials, commodities, technology and telecom are least impacted by rising inflation. Therefore, many sectors facing the risk of earning downgrades but overall profitability at the Index level is limited. Therefore, new sectors will take a leadership growth over a period of time. The breathing factor is that, if we look at the FII/DII figures from April 2021 to March 2022 YTD, the DIIs have almost tried to absorb the net selling of Rs 2.13 lakh crore of FIIs by net buying to the tune of Rs 2.12 lakh crore in the Indian equities market. Hence, giving some comfort over the liquidity front. Also, from the future perspective once volatility cools down and investment of FII’s start coming, we might see new highs in the market.
Market consensus is that in the medium term, the market is expected to remain volatile due to uncertainty about the resolution of the Russo-Ukraine war, input cost inflation, the possibility of rate hikes.
Current high volatility likely to go down and settle below the long-term average as soon as we enter into a rate-hike cycle and the trajectory for the actual number of rate hikes projected for 2022 will be known to the market. So, I believe second half of 2022 will be more stable as compared to the first half
In the last 2 years there has been massive outperformance in the broader market. Small Cap and Mid cap are trading at a slight premium to large cap. Given that broader market earning are no more positive and valuation are higher, the over all risk reward is relative favourable for largecaps. As such opportunities are available across the size spectrum, it may be prudent to prefer multicap approach with slight tilt in favour of Large cap.
I strongly believe that the current volatility is an opportunity to accumulate quality largecap and select midcap companies because Quality matters and fundamentals come to the fore in the volatile phase. The largecaps are better equipped to weather macro challenges
