Semi-Annual Update January 2023


2022 has proven difficult for pundits and investors alike. Popular themes in 2021, like investing in international technology stocks and momentum, underperformed significantly. Investors who held gold, bonds or the simple Nifty 100 saw positive returns. The Indian rupee depreciated by over 10%. That said, Indian large-cap equities were a bright spot in global equity markets, several of which suffered significant drawdowns.

The Indian economy performed below expectations at the start of the year. Slowing global growth, slower than expected rebound of capex and employment in the country and the growing worry of inflation were all contributors. In our updates, we have been flagging the increased risks and possibly lower future expected returns compared to the performance of assets over the previous decade. The forward multiples for India are high both on a historical basis and when compared to other international markets as of the end of December 2022. Research has shown that high starting valuations tend to be associated with lower forward returns. This high valuation is a concern for many investors and analysts.

Inflation continues to exceed the upper limit that the Government of India has set for the RBI’s Monetary Policy Committee. Like many central banks, the RBI is on a hiking path to keep inflation under control. Consumer confidence is close to the pre-pandemic levels. However, as we have seen, this can change rapidly. Many economists have flagged the macro-economic risks for the economy in the near and medium term. 2023 promises to be a year filled with uncertainty for investors. 

Against this backdrop, we have changed our long-term capital market assumptions (expectations of returns and risks) for our five asset classes. The elevated valuations for equities imply that forward return expectations should be lower – so we have reduced returns by one percentage point to 13% while keeping volatility the same. For fixed income, as we expect interest rates to remain elevated for longer, we increase the expected returns between 50 and 75 basis points: 7% for Cash & Cash Equivalents and 8.25% for Debt (a blend of different durations and credits). At the same time, we have increased the riskiness of these assets – reflecting the higher risk associated with the interest rate regime due to a more uncertain economic outlook. Finally, we have added 1% to the expected returns of Gold. The precious metal remains an asset popular during uncertain times. A well-diversified portfolio remains a good alternative for most investors, despite the higher uncertainties of future returns. Chasing returns potentially increases the risk significantly, as 2022 demonstrated. Consult your financial advisor and review your portfolio against your financial objectives.

Our long-term expectations of returns and risk serve as the basis for building the baseline “desired zone” of expected Return and Risk for different risk profiles in the Qfinr app. Our approach generates over 3 million portfolios of varying allocations to the five asset classes from which we select risk-return trajectories for each of our five risk profiles.

For a medium-term investment time horizon (3-5 years), the asset allocation investors could consider is shown in Table 2. As a result of the changes to the capital market assumptions, the ranges for asset allocations have increased, giving more choices for investors.

Users can compare their portfolios’ expected returns and risk characteristics against ‘ideal’ portfolios in qfinr as input for discussions with their financial advisors. We caution that inflation will reduce real returns, especially for long-term portfolios. A 6% inflation means that prices will double approximately every 12 years. India experiences a higher inflation rate than most developed markets, and investors should plan portfolios that generate real returns.

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PS: If you want to know more about historical returns of asset classes in India, read ‘Nominal and Inflation-Adjusted Asset Returns in India: A Historical Survey, 2022’. Our team has also published a paper on the valuations in the equity markets and the forward returns titled ‘Shiller’s CAPE and Forward Excess Returns in India’ that might be of interest. For a detailed review of international diversification from an Indian perspective, see ‘International Diversification in Equity Portfolios: An Indian Perspective.

Important Disclaimer

qfinr is not a financial product advisory service and does not provide any financial product advice specific to your circumstances. We provide numeric information only based on data entered by the user and/or data otherwise available to us. The output presented is derived from that information due to calculations using our methodology. This output, in itself, is not a recommendation or a statement of opinion. It is not a solicitation or attempt to effect transactions in securities or the rendering of personalised investment advice. As such, the information should not be construed as personalised financial, investment or professional advice, nor should it be deemed an offer or provision of such advice.