This will be a first for many investors who joined the rush into equities in recent years and for whom ‘buy-on-dips’ was a sure shot strategy to make money in the market.
With interest rates expected to remain higher for a longer period, investors may need to brace for a period of some wild swings that could be unnerving.
ET takes a look at some of the factors that could determine investor behaviour in 2023 and what could investors do:
Quantitative Tightening
2022 witnessed a tug of war between a hawkish US Federal Reserve and a dovish financial market with the American central bank being forced to step in after every monetary policy to tell investors to tone down expectations. In 2023, the Fed could take full control of the narrative, which could mean interest rates could remain elevated for longer than what investors are expecting. The impact of quantitative tightening on corporates – including zombie companies – will be seen in 2023. With debt servicing costs seen shooting up because of higher interest rates, any adverse event in the US credit markets will be felt on markets worldwide.
Inflation
Commentary by Wall Street analysts suggest that the inflation in the US is way stickier forecasts because of the hot labour market. Cynics argue that inflation cannot be brought under control without a hand landing in the US. “God forbid inflation proves more to be sticky, then rates will be higher for even longer, which will not be good news for a lot of risk asset classes,” said Rupal Bhansali, CIO, Ariel Investments.
The Russia-Ukraine war will also keep commodity prices higher, heightening stagflation concerns.
Oil/Energy
With restrictions on Russian fuel exports, global energy markets may continue to remain in short supply, keeping prices elevated despite an economic slowdown. Mirae Asset said the severity of the winter in Europe, which has been impacted the most by sanctions on Russia, would lead to energy demand, impacting global sentiments. For India , a net importer of crude, continued high oil prices is bad news as the current account deficit widened to a nine-year high.
Covid
Worries about the spread of a new variant of Covid has dented market sentiment in recent weeks. But investors are not concerned that the fresh wake in North Asian countries like China and Korea will result in a sharp selloff. This factor will, however, add to anxiety of investors, who are already on the edge.
Passive vs Active Investing
The tighter interest rate regime is likely to alter the nature of flows. Passive flows based on complex and sophisticated quantitative strategies, which dominated the investment world in the past decade during the ultra-low interest rate setting, are facing challenges. “When you invest based on flows, you’re very sensitive to money supply,” said Bhansali..
“With this regime change, a lot of this passive quant funds will start taking money out of the market.” Bhansali said unlike a passive investor, who deploys money based on formulas, momentum and flows, an active investor focusses more on valuation. That could make foreign fund flows into emerging markets like India a lot more uncertain in the coming months.
Share Valuations
One of the biggest hindrances to another blockbuster year for Indian stocks is their rich valuations after years of repeated outperformance. The MSCI India Index is trading at a Price to Earnings ratio of 25 times compared to 12.5 times of the MSCI Asia index. Though India has historically enjoyed premium valuations because of strong corporates, investors are raising questions whether such valuations can sustain in the event of a slowdown in 2023. Global equity strategists are expecting fresh fund allocations to cheaply-valued North Asian markets like China and South Korea in 2023 unless the fresh wave of Covid infections depresses their economies further.
Stocks vs Fixed Income
Despite interest rates rising in 2022, fixed income instruments have not been able to attract investor interest as expected. Some of this shift to fixed income could happen in 2023 if one-year returns from equity mutual funds disappoint and interest rates remain elevated. Investment advisors expect deposit rates to firm up as banks’ race for deposits heat up in 2023. Senior fund managers said the risk reward is broadly unfavourable for equities and is tilting towards fixed income.
