Market Update June 22

The first half of 2022 was a period of extreme downward volatility for financial markets. It was unique in the sense that all asset classes (Equities, Fixed Income, Crypto, Gold etc.) fell in value. The US fixed income markets had their worst half year in 150+ years!

Key events which we saw in the last quarter

Very high inflation in developed economies – CPI Inflation in the USA came in at 9% in June. The last time we have seen such a high number was in 1981.

Rising interest rates across the world – All major economies of the world have seen an increase in interest rates. RBI also raised rates in India, following rate hikes in USA, UK and Australia. With inflation remaining sticky, more rate hikes are expected in the coming months.

Shrinking US Federal Reserve Balance Sheet – The shrinking Fed balance sheets (popularly known as Quantitative Tightening), has started resulting in liquidity getting squeezed across the world. Hence, deals in the start-up/VC space have also dried up.

What major developments took place in the global markets?

Losses in the US Bond Markets – Between Jan and April 22, US long term bonds lost 18%. That is the worst performance since 1842! US investors have removed more than 100 billion USD from bonds this year with average losses exceeding 10% on the fixed income side. We are seeing such losses in the bond market after a bond market bull run which was there for 40+ years.

Cryptos lost a sizable chunk of its value as well – Bitcoin, the most popular of the cryptos saw a price drop from $35k per unit to less than $20k. Other cryptos followed suit and some like Luna closed down completely.

Global Equity markets lost 13 trillion USD in value in H1 2022 – As per Morgan Stanley’s MSCI Index the H1 2022 performance is the worst ever in 30+ years! Tech heavy indices like Nasdaq fell even more with corrections of more than 30%. From peak valuations, the fall has been more than 20 trillion USD.

Chinese Real Estate saw a fall – A lesser-known fact is that the world’s largest asset class is Chinese real estate. The collective value of Chinese real estate exceeded 55 trillion by end of 2021. In the last quarter alone, this market shrunk 7% (that is more than India’s annual GDP!)

Gold has also fallen – After touching a high of around $2050 per ounce in March 2022, the Gold is now trading around $1750 per ounce.

USD has appreciated against all currencies – The Dollar index has moved from 100.65 in April 2022 to the current value of 106.82. This means that all currencies have depreciated against the USD. This may have been triggered by increasing interest rates in the US.

What’s the story with the Indian Equity Markets?

Steep cuts in mid and small caps – While the large cap index and stocks have corrected about 10%, the fall has been much higher in the mid and small cap space. The small cap index fell by about 17%. Coming off a strong 2021, lots of small cap stocks have seen corrections in excess of 25%. Among the sectors, Technology, Real estate and Pharma have seen the biggest falls.

Never ending FIIs selling in Indian Equities – The FIIs continued to sell Indian Equities and they have sold more than $40 Billion in the last 9 months. In normal circumstances, this heavy selling would have resulted in two things.

• INR depreciating drastically which didn’t happen, thanks to our high forex reserves.
• Equity markets tanking big time, which also didn’t happen, thanks to much increased retail and domestic institutional participation

Key drivers in the very short run

• Oil price movement
• Quantum of FII Selling
• When the Russia – Ukraine conflict will cease
• When global inflation will start to cool off
• Frequency and magnitude of interest rate hikes by central banks

Trying to make predictions about these variables in the short run is extremely tough and often futile. However, this takes up a large amount of time and energy for the media and investors. In their recent reports on the Oil Prices, Citibank and JP Morgan have taken very different views. While Citibank predicts $45 per barrel of Oil if recession has to happen, JP Morgan has predicted $380 a barrel (!!) if Russian supplies to Europe were to be cut. Only time will tell who is going to be right.

What we should do to take advantage of the current situation for the long term

The biggest edge which we enjoy as retail investors is our ability to take a long-term view. We have the choice to ignore the short-term pain and continue to focus on our financial goals in the long run. Our asset allocation needs to be aligned with these goals. Since all asset classes have fallen in 2022, several investing opportunities have opened up

Attractive entry points for Indian equities – If your current asset allocation towards equities is on the lower side, then the current market scenario does offer an excellent opportunity from a valuation viewpoint. Avoid lump sum investments as the near-term outlook is uncertain. However, consistent allocation to high quality fund managers will definitely give good returns over time

Consider global equities as well – Remember that 97% of the equities in the world is outside India. The US has been the hub of innovation for decades and their markets have rewarded value creators richly. The current scenario offers an opportunity to consider world class tech companies available at a reasonable valuation

Lock in fixed income options – The increase in interest rates has meant that the yields on g secs as well as corporate deposits have gone up. We believe the medium-term bonds is a good area to consider for fixed income investments.

You may reach out to us on your specific portfolio queries and we are happy to discuss it further.

Happy Investing
Venkat & Prasanna