The foundation of India’s economic resilience lies in its prudent fiscal policies, exemplified by controlled fiscal deficits, current account deficit management, and inflation containment. This steadfast approach has instilled confidence in investors, paving the way for a sustained bull market over the last decade and more. Notably, India’s inflation differentials vis-a-vis Western economies, particularly the US, have narrowed significantly, which in itself is a record given that most often Western countries tend to have lower inflation levels as compared to India.
Apart from this, the transformation of India’s corporate sector since 2010 has been pivotal in driving growth and investor confidence. With a renewed focus on transparency and governance, businesses have strengthened their fundamentals, strengthened their balance sheets, thereby fostering a conducive environment for investment. Similarly, the banking sector underwent a rigorous clean-up process, restoring trust and stability in the financial system.
Valuations based on price-to-book and market cap-to-GDP ratios indicate that Indian markets are not cheap, particularly in the mid-cap and small-cap segments. Today, mega-caps and large-caps appear to be better placed than mid-caps and small-caps. Since the valuation remains on the costlier side, and when investor sentiment is very positive, one should be circumspect and recognise the risks amidst a big bull market. So, we believe, it is in the investor’s interest to adhere to a holistic asset allocation framework. The sharp moves seen in commodities, especially gold and silver, have been a welcome move.
One of the learnings from managing public money has been that market bottoms are easier periods to invest in while market highs are a period when one must have a cautious approach to investing. Over the last six months as the markets have been edging higher, emphasis has been placed on asset allocation strategies, such as multi-asset allocation and balanced advantage offerings. Despite India being a very good long-term structural story, we have always believed that such strategies work well at market highs. A balanced approach encompassing debt, equity, and commodities can optimise risk-adjusted returns and enhance portfolio resilience.
Within the realm of asset allocation, Indian fixed income also emerges as a compelling investment avenue, bolstered by its inclusion in bond indices, controlled inflation, and declining fiscal deficit.While India’s outlook remains promising for the next decade, thanks to the prudent policy framework laid down by the government and the Reserve Bank of India, it is imperative for investors who wish to add equity to their portfolio to maintain their focus on large-caps and schemes that have flexible investment mandates.(The author is Chief Investment Officer at ICICI Prudential Mutual Fund)
