‘Lollapalooza effect’ at play in stock markets, says Motilal Oswal. What to do?

Market


The performance of Indian markets this year can be best described by just one word: Volatile. From 18,300 levels of Nifty in January to 15800 levels in early March, the market has been very choppy.

According to Ashish Shanker, MD& CEO, Motilal Oswal Private Wealth, in the current environment, the “Lollapalooza Effect ” is at play. “From a short term lens, several factors viz. war in Ukraine leading to elevated commodity prices on account of Russia being one of the major suppliers of key commodities; hike in interest rates, etc. have meant heightened volatility,” he says in the April edition of the wealth management firm’s Alpha Strategist report. 

The term Lollapalooza Effect was coined by Charlie Munger, vice chairman of Berkshire Hathaway, It basically means that a confluence of factors acting together can be especially powerful drivers of human behaviour and this can lead to both positive and negative results.

Motilal Oswal Private Wealth believes that this year will be a year of consolidation for markets but from a longer-term perspective market fundamentals remain ‘robust’. 

“From a longer term viewpoint though, domestic equity market fundamentals remain robust given healthy balance sheets, low debt-equity & improving ROEs leading to steady earnings growth outlook. The longer term vision for India’s macro remains positive with gradual progression toward a $6 trillion economy over the course of this decade, Mr Shanker said. 

Equity Strategy

Motilal Oswal Private Wealth’s proprietary Temperature Gauge Index indicates that equity market is in the fair valuation zone. 

“Hence for incremental allocation to equities, we suggest 50% deployment immediately and 50% to be staggered over a period of 3-6 months. We continue to maintain bias towards Multi cap and select Mid & Small cap strategies across MF/PMS/AIF,” the wealth management firm recommends. 

Despite the significant challenges such as Ukraine crisis, gradual withdrawal of excess global liquidity, relentless rise in commodity prices, disruption in supply chains, “the fact that the Nifty is down barely 5% from its recent high underscores its resilience,” it says. 

“Markets never fail to astonish and what has been a pleasant development is the rise of DIIs investing in equities to the tune of over $26 billion in FY22 countering the outflows by FIIs ($17.1 billion).”

Motilal Oswal Private Wealth believes that “BFSI and IT companies have been somewhat immune to the geopolitical crisis and could continue to do well; Metals and mining companies have benefitted on the back of unyielding rise in commodity prices while the same has had a negative impact on consumption driven companies. Autos, consumer staples and cement could see a decline in margins due to rising commodity costs in Q4FY22 results while upstream Oil & Gas as well as Metals could see a sharp uptick during the same period.” 

Fixed Income Strategy

For the domestic fixed income market, concerns on higher inflation due to rising crude and commodity costs have led to the yield curve getting steeper. 

“Recently concluded MPC meeting revised growth projections to 7.2% for FY23 from 7.8% earlier while keeping the rates unchanged and maintaining its accommodative stance. Albeit, RBI’s move to replace FRRR with SDF indicates an explicit start of monetary tightening making it clear monetary policy normalization has started,” Motilal Oswal Private Wealth said. 

For fixed Income portfolios, the wealth management firm suggests “following a barbell portfolio approach i.e. having core allocation to high quality accrual oriented funds with maturities of 4-6 years, complemented by 20-30% allocation towards long maturity and high quality roll down strategies. Tactical allocation to select high yield strategies, MLDs, REITs, InvITs can help enhance the yield on fixed income portfolios. Gold should be treated predominantly as a hedge against heightened volatility.”

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