The year 2023 presented unexpected challenges for investors in various asset classes. It emphasized that, despite the importance of logic and analysis, markets always maintain an unpredictable element, adding excitement and occasionally causing anxiety.
Risk got redefined in 2023
Several financial experts have remarked on the way abrupt geopolitical upheavals have disturbed traditional risk assessments, challenging conventional investment concepts. The persistent influence of risk before and after each investment decision is a factor that few investors will easily overlook. The unforeseen repercussions in various sectors resulting from central banks’ assertive rate hikes to counter inflation meant that even conventional investors were not shielded from market risks, compelling them to incur higher costs during loan repayment.
Viral Bhatt, Founder, Money Mantra said, “2023 saw significant market volatility, with geopolitical issues, inflation, and interest rate hikes causing major fluctuations. This highlighted the need for investment strategies that could adjust to changing circumstances, rather than rigid approaches based on past performance.”
Mohit Ralhan, CEO, TIW Capital added, “2023 turned out to be a year of positive surprises on the macro front. The US economy, faced with the most aggressive monetary tightening cycle in decades, not just avoided a recession but grew above its potential growth rate. The Federal Reserve has nearly orchestrated a soft landing, chances of which seemed slim at the year beginning. Eurozone and UK economies also fared better than expected. The common factor underpinning has been the strength of the labour market. While 2023 was all about monitoring the inflation trajectory, 2024 will be about how the labour markets shape up.”
Geopolitical factors sparking an energy crisis led to a substantial surge in oil prices, exerting a significant impact on the markets. This influence extended to various sectors previously considered insulated from market sentiments. Bhatt furthered, “Emerging risks like cyberattacks and climate change, became more prominent in 2023. This emphasized the importance of diversifying portfolios beyond traditional assets to mitigate potential losses from unexpected sources.”
Shift in focus from large-cap to small-cap
Following the Covid pandemic, concerns arose about a potential K-shaped recovery, but growth has now become more widespread. Notably, China’s recovery has been relatively subdued. Although there was a growth surge when China lifted Covid restrictions in late 2022, it quickly subsided. In contrast, India has experienced growth in both manufacturing and services.
Vaibhav Jain, Head of Content & Education, Share.Market (PhonePe Wealth) said, “In 2023, equity trends showcased a notable shift towards public sectors such as railways, defence, and PSU banks. Simultaneously, it marks a standout year for discerning stock pickers. While the Nifty 50 achieves a commendable 20 per cent return, mid-caps and small-caps steal the spotlight with gains of 42 per cent and 46 per cent respectively. Notably, select stocks within these segments shine, emphasizing the lesson for investors—success lies in adeptly choosing and holding the right stocks.”
Ralhan added, “In the Indian market, small and mid-cap stocks outperformed large ones by a wide margin. Benign beginning valuations and solid earnings growth led to a rally in the space. The outperformance attracted more investors through the mutual fund route. While aggregate mutual fund flows remained on an uptrend, investors also made a switch from large-cap schemes to small-cap schemes.”
Logic defied
The formerly dominant tech sector, often regarded as a secure haven, experienced significant declines that questioned the narrative of tech dominance. Contrary to pessimistic forecasts, consumer spending remained unexpectedly resilient despite concerns about inflation. Additionally, although a housing market crash was anticipated by many, home prices in numerous regions remained stable, indicating sustained demand.
Ralhan explained, “One should maintain caution while getting into stocks that are more exposed to global demand. IT stocks, for instance, can remain under pressure. Global macro uncertainty could weigh on discretionary IT spending in 2024. Valuations of companies especially in the mid-cap IT space have already baked in a recovery in subsequent years. So, unless order book growth surprises on the upside next year, the chances of outperformance are low.”
Avoid attempting to predict market timing
Despite discussions surrounding sectors exceeding or falling short of expectations, and the market’s responsiveness to unforeseen events, it is evident that attempting to time the market remains an ineffective strategy. CA Kanan Bahl, Founder, Fingrowth Media comments, “Economists might be right in their prediction about the markets. However, the analysis doesn’t always translate into the right predictions concerning the market movements. They predicted massive foreign institutional investors’ outflows last year and we did see them. However, markets were hardly impacted as retail inflows via domestic institutional investors increased which no one saw coming. Hence, it is a futile exercise to time the markets.”
Be willing to wait while focusing on asset allocation
Success in the stock market hinges on patience. It’s commonly expressed that the market acts as a mechanism for transferring wealth from the impatient to the patient, and this holds substantial truth. There will be fluctuations, moments of prosperity, and decline. By maintaining patience and staying invested during challenging periods, you stand to be rewarded when the market ultimately rebounds.
Vivek Banka, Co-founder, GoalTeller said, “2023 reiterated a very important lesson to us about asset classes reverting to their long-term means sooner or later We saw small caps, mid-caps, PSUs, railway stocks and more bouncing back with a vengeance, after years of underperforming/ living in the shadows of their peers. This once again demonstrates that asset classes over long periods revert to their long-term averages. In case, if one is stuck with an asset class that is underperforming it is wise to be patient as long as one is within their prescribed asset allocation limits. We also saw December witness the bounce back of large caps which have been fairly dormant now and could be the most deserving candidates to continue and witness a rebound and hence a reversion to their means.”
“Crucially, 2023 underscores the importance of asset allocation, eradicating the need for second-guessing exits. Moreover, India’s financial resilience to global influences like wars becomes evident, with foreign and domestic investors showcasing unwavering faith. Both FIIs and DIIs had net inflows this year which have been amongst the highest received in a calendar year. This further reaffirms the belief that the current decade continues to be India’s era,” shared Jain.
Banka added, “Investors also need to understand that asset classes that deviate on the upside from their long-term averages, i.e., have given very strong returns in the recent past might not be the winners of tomorrow and hence it is important to stay away from euphoria and invest basis long term trends and their asset allocations basis their risk profiles. Inappropriate asset allocation is a factor one should be very careful of as investing in the latest fad can potentially lead to large falls or years or underperformance.”
Pay attention to stock valuations
Stock valuations carry significant importance, albeit with nuances. Elevated valuations often signal anticipated robust future growth, potentially indicating higher long-term returns. On the contrary, lower valuations suggest a slower growth trajectory or even the risk of decline. Grasping the intricacies of valuations enables investors to compare various stocks and evaluate potential risks and rewards. This understanding serves as a guide for decisions regarding buying, selling, or holding a specific stock.
Hiren Thakkar, Chartered Accountant Proprietor, Hiren S Thakkar & Associates elucidated, “Always add equity exposure when there is margin of safety. You seldom go wrong when you invest at competitive valuations. Jan-March 2023 was such a period. When you invest in the euphoric environment your future return potential diminishes.”
Keep a check on credit needs
Utilizing loans as effective instruments for reaching financial objectives requires a cautious and well-thought-out approach. It is vital to carefully manage your credit requirements to engage in responsible borrowing and secure favourable terms.
In 2023, there was a notable increase in loan applications from both banks and diverse financial institutions. With various loan options tailored to different needs and repayment capabilities, along with a degree of flexibility in financial management, an increasing number of individuals sought credit facilities from fintech organizations.
Adhil Shetty, Co-founder and CEO, BankBazaar.com shares, “Loans got costlier. But we also experienced higher than average demand for credit. Retail loans grew a whopping 18 per cent to ₹45 trillion despite the RBI’s deflationary measures. Small loans and credit cards were the showstoppers. Such was the demand for loans under ₹50,000 that the RBI ended the year with a policy action to slow down this loan segment.”“There may be signs of incipient stress in small loans. The takeaway is that consumers are borrowing for consumption, aspirations, and emergencies. They may also be borrowing simply because they can—sometimes without understanding the impact of those small loans on their credit health. Money borrowed needs to be repaid in full and on time, and making a monthly check of one’s credit report can help develop healthy financial habits. On the flip side, irresponsible use of small loans can wreck your credit health and have wide-ranging negative repercussions on your financial life. Heading into the new year, every borrower must think about this,” Shetty added.
Moving forward, the insights gained in 2023 will undeniably influence investment strategies in the upcoming year. Emphasizing diversification, flexibility, and resilience is likely to be crucial. Furthermore, maintaining a healthy dose of humility and recognizing the market’s inherent unpredictability will prove beneficial for investors. Entering 2024, investors envision an empowered Bharat, where each sector and every stakeholder plays a role in building a more robust and progressive nation.
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