Tuesday's Talking Points
2023 Round-Up: Year Gone By Reiterates Asset Allocation is Key!
What’s the Point? (A Brief Summary)
Asset class returns in CY23 went contrary to many an expert’s perceptions at the start of the year. Equities, especially small-caps posted high returns, along with Gold. Fixed Income assets on the other hand, held on to the high yields, and therefore delivered returns close to the reported YTMs. As we enter the new calendar year 2024, one looks forward to an eventful year for India, with the general elections, EM Bond inclusions, a potential recovery in private capex, strengthening of our position as the fastest growing major economy, among others.
Asset class returns for the last 10 years
Note: Returns greater than 1-year period are Compounded Annualised (CAGR).
Source: Bloomberg, NIFTY Indices, CRISIL Indices
Equities – A Year of Strong Broad-based Returns
Globally, the relative strength in macros, coupled with inflation coming off from highs meant that equity markets were buoyant, with the MSCI World (representing developed world) giving 24.5% returns (INR terms). The MSCI Emerging Market Index lagged with 10.5% returns, with China facing economic growth troubles and dragging the index.
In India too, 2023 was a very favourable year for equity as an asset class. While Large caps as represented by the NIFTY 50 TRI was up 21.4%, the broader universe represented by the NIFTY Midcap 150 TRI and NIFTY Smallcap 250 TRI were up 45% and 49% each! The strong performance by the broader market has pulled up the 3 year and 5 year returns too – highlighting how the journey in equity returns can be volatile but rewarding. Interesting to note in the above table is that in the past 6 years, Small caps have been the top performers in 3 years, and bottom performers in the other 3! Sectors such as Realty, Auto, Infrastructure, Pharma, commodities, consumption and IT did better than the overall market. With divergence in performance across sectors, alpha made a comeback, with a larger share of mutual fund AUM also outperforming their respective benchmarks.
At the current juncture, valuations for large caps are above average. However, given the robust economic outlook, recovery in capex cycle and profitability of Indian corporates, investors should remain cautiously optimistic.
Fixed Income Markets – Representing Time to Accumulate
While global yields saw very heavy volatility, Indian yields saw remarkable resilience and moved within a relatively narrow range throughout the year. Liquidity was a notable change, with surplus liquidity in the system giving way to deficient liquidity during the year. With policy rates at their potential peaks, potential EM bond inclusions, external sector comfortable, in our view it’s a time to accumulate debt, and while one is at it, to consider adding duration to their portfolio to potentially gain from a reduction in interest rates in line with risk appetite.
Real Estate – A Big Asset Class waking up?
The past decade has seen real estate largely delivering sub-par returns, barring some geographies. With rising incomes, stagnant prices have meant that affordability for real estate has shot up. Increasing urbanization and formalization in the economy, along with reform in the sector has improved the outlook in this asset class as well. Data from urban centres around new project launches and sales of units have been positive, further adding confidence.
Gold and Silver – Safe Haven Assets did well in 2023
In a year marked by high geopolitical uncertainty, with potential for lower interest rates, precious metals such as gold and silver reported returns of 15% and 8% respectively. Historically, environments with decreasing rates have been favourable for precious metals, and thus, this asset class could be interesting going forward.
Conclusion
2023 was a year that was another validation of the late Dr. Markowitz’ efficient frontier – and the strengths of diversified portfolio in the long term. Variance in timings of returns from asset classes in the past highlight the importance of diversifying portfolios towards multiple assets based on risk tolerance and return expectations. With each of the above asset classes interestingly positioned, Investors must consult advisors to determine the optimal asset allocation for their individual needs. India’s economic resilience and growth outlook remain the bedrock of our comfort for investors to stay invested for the long term.
As we look forward to 2024, a round-up of the year gone by can be a useful read. An interesting perspective was penned down (like every year!) in the “Person of the Year", an annual article written by Navneet Munot, MD and CEO, HDFC AMC. Written in a witty and equally hard-hitting manner, the article presents to you a captivating flashback of events which left an indelible mark on world in 2023; and also look poised to shape the world in the future.
Sources: Bloomberg, NIFTY Indices, CRISIL Indices and other publicly available information.
About Tuesday’s Talking Points (TTP): TTP is an effort by HDFC AMC to guide key conversations in the Indian financial markets and investing ecosystem. We aspire to do this by providing relevant facts, along with our perspective on the issue at hand. If you have a topic that you would like to be featured here please write to us at [email protected]
Disclaimer: Views expressed herein, involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied herein. Stocks/Sectors/Views referred are illustrative and should not be construed as an investment advice or a research report or a recommendation by HDFC Mutual Fund (“the Fund”) / HDFC Asset Management Company Limited (HDFC AMC) to buy or sell the stock or any other security. The Fund/ HDFC AMC is not indicating or guaranteeing returns on any investments. Past performance may or may not be sustained in the future and is not a guarantee of any future returns. Readers should seek professional advice before taking any investment related decisions.
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