'Continue with your SIPs to get the benefit of lower average prices in this challenging market environment.'
Diversified equity funds have struggled to deliver satisfactory category average returns over the past 12 months.
Large-cap funds have yielded a meagre return of 0.6 per cent, mid-cap funds have generated 1.9 per cent, while small-cap funds have fared slightly better with a return of 3.4 per cent.
This challenging market environment is due to a 'perfect storm' of various problems arising in quick succession.
"First, there was the Russia-Ukraine war. Then the interest-rate environment shifted drastically from very low to very high rates. There have been growth-related concerns in several major economies. And recently there has been the banking crisis in the US and Europe," says Sailesh Raj Bhan, chief investment officer-equity investments, Nippon India Mutual Fund.
The bleak global macro-economic scenario has played a big part.
"In the past one year, the US Federal Reserve has raised rates by 475 basis points, the fastest pace of rate hikes ever. Foreign institutional investors have pulled out US $25 billion. The S&P has entered a bear market and the US treasury, the world's safest asset, has also delivered negative returns," says Niket Shah, fund manager, Motilal Oswal Asset Management Company.
Periods of blockbuster returns tend to alternate with poor returns.
"What we are witnessing now is a normal process of market consolidation after a period of very strong return from 2020 to 2021," says Chandraprakash Padiyar, senior fund manager, Tata Mutual Fund.
Rising rates have impacted equity valuations.
"Earnings did grow over the past year. But Indian equities were trading at premium valuations earlier. Those got de-rated. It nullified whatever earnings growth occurred, resulting in flat returns," says Arun Kumar, head of research, FundsIndia.
Optimistic over medium term
Some fund managers believe the correction is in its final leg.
"We expect most of the negative news around global banks, interest rate cycle and inflation to peak out in the next three-four months. After July, once the Q3 results are out, the markets should bottom out and then we could witness the start of the next bull market rally," says Shah.
A deceleration in economic growth may compel central banks, notably the US Federal Reserve, to initiate interest rate reductions by late 2023.
This would act as a pivotal catalyst for the next market rally.
Fund managers remain optimistic about the fundamentals of the businesses they invest in.
"Large-cap businesses are among the best in India in terms of quality with very little debt on their books. And they are relatively small compared to large-caps in the US, which means they have a long growth runway," says Bhan.
Indian large-caps are expected to gain from the consolidation occurring across sectors, resulting in revenue and profit share gains.
Shah believes midcaps are the best placed to gain from India's strong fundamentals.
"We have one of best capitalised banking systems and low corporate debt. Also, a large number of reforms have been implemented in the last decade, whose dividends lie ahead. And India is among the few young countries in an ageing world," he says.
The search by multinationals for a manufacturing base outside China has presented India with an unprecedented opportunity.
"Manufacturing, both from an indigenisation and export perspective, is a major theme we are optimistic abo. We are also optimistic on entrepreneurs focusing on research and development and innovation to manufacture for the world, and them trying to create a component ecosystem within India," says Padiyar.
Earnings growth may pick up after a few quarters.
"Inventory correction is occurring across the world, including in India. While earnings growth is likely to be slow over the next few quarters, it is likely to pick up pace thereafter," says Padiyar.
According to Bhan, earnings are expected to grow at 8-10 per cent over the next 12 months and then rise to 12-15 per cent thereafter.
Kumar says with valuations in the neutral zone, equity returns are likely to be in line with earnings growth in the near future.
Risks to watch out for
Earnings in India have been weak for the past two quarters.
If global demand remains weak, Indian companies' earnings would also be negatively affected.
The Indian economy depends on crude imports and on FII/FDI (foreign direct investment) flows.
"Any adverse move on both these counts may lead to a slowdown in economic growth, which could impact the equity markets," says Padiyar.
What investors should do
Despite the negative news flow, investors should continue to invest in line with their asset allocation.
"The valuation differential between large caps on the one hand and mid- and small-caps on the other is not such that you should go tactically overweight on either," says Kumar.
If in your domestic portfolio you had an allocation of 70 per cent to large caps, 20 per cent to mid caps, and 10 per cent to small caps, stick to it.
Keep only long-term money in equity funds.
"Invest in equities with a horizon of seven to ten years," says Himanshu Srivastava, associate director, Morningstar India.
The US market has been hit by rising interest rates and recessionary concerns.
"Continue with your allocation to global funds nonetheless to benefit from geographical diversification," says Srivastava.
Despite the pain in equities, avoid pausing your systematic investment plans (SIPs).
"Continue with your SIPs to get the benefit of lower average prices in this challenging market environment," says Srivastava.
Doing so will boost portfolio returns when the markets rebound.