As FY23 starts, Rajesh Cheruvu, Chief Investment Officer at Validus Wealth, shares his thoughts on asset classes such as stocks, bonds, gold and global equities.

The beginning of the new financial year is always a good time for investors to revisit their financial goals and carve out their financial plans. Rajesh Cheruvu, chief investment officer at Validus Wealth, shares his views on various asset classes and what precautions investors should take while constructing their portfolios. Edited excerpts from an interview:

With the start of FY23, what key actions must investors take in their portfolios? What’s the outlook for equity investors and challenges ahead?

We are positive on equities. There are concerns such as high oil prices, inflation, worries around future growth and geo-political tensions, but they are already priced into the current market prices to some extent. So we see it as an opportunity from the medium- to longer-term perspective for equity investors. We advise investors to allocate more to large-cap stocks over mid-cap stocks.

Some stocks have fallen much more than the headline index. Expectations of quantitative tightening in the US have led to an increase in the cost of capital for business. The market will wait for the details of quantitative tightening – the magnitude and pace. This should keep the market volatile.

Do you recommend booking of profit from any investment theme or any asset that has done well in FY22?

Information technology is one sector that has seen an improvement in growth outlook. But valuations have moved significantly ahead of the fundamentals. We do not see a significant upside from here. Valuation multiples of some technology platform companies have already seen compression. IT services is one area you might see some amount of profit-taking in the near term.

Any themes that mutual fund investors should add to their portfolios for strong returns in FY23? Why?

Auto sector and banking sector have underperformed in the last couple of years. The 10-year government bond still offers a positive real rate to the investor. Hence, Reserve Bank of India may not be in a hurry to raise interest rates. The economic growth outlook and the expectation of a significant increase in capital expenditure should work in favour of interest rate-sensitive sectors such as banks, non-banking financial companies, auto and auto ancillary. Investors can also look at the domestic manufacturing sector.

Retail inflation in February was at an eight-month high and breached the RBI’s comfort zone. How does rising inflation affect multiple asset classes?

Crude oil price-led inflation is yet to reflect in inflation numbers in our economy. Fuel prices need to be hiked further. Inflation should go up by 50 to 60 basis points from here. However, inflation in agri-commodities and other hard commodities such as copper, aluminium and nickel may be peaking. Because of the ongoing geo-political tension, prices of energy commodities such as crude oil, gas and coal may continue at a high level and keep inflation elevated.

Though we are a net energy importer, compared to 2013, our forex reserves are better and they actually provide comfort for the currency. Hence, we anticipate relatively less volatility. Current volatility in equities offers a good opportunity to build a position in equities from the medium- to long-term view.

The RBI may start hiking interest rates in India. What is your view on interest rates? Should investors tweak their fixed income portfolios? How?

Over the next 12 months, we are not expecting a hike of more than 50 basis points in repo rates by the RBI. Most popular bond fund categories such as short-duration, medium-duration and banking & PSU bond funds offer around 5 percent yield net of expenses. So you are getting negative real returns.

Credit risk funds also do not offer adequate returns for the extra risk you are taking. But conservative investors have to allocate money to fixed income. They should allocate money to low-duration, money market and short-duration funds.

Investing in bonds with residual maturity in excess of three years should be avoided as volatility is expected to eat into your returns. Market-linked debentures and non-convertible debentures of good quality NBFCs with AA and above ratings can be considered. RBI floating rate savings bonds also can be considered.

Should investors continue to invest in global funds, considering the war between Russia and Ukraine, which has affected global markets?

Investors should not look at global investing as a seasonal activity – it should be a part of structural allocation. The core portfolio should have diversified funds such as S&P 500 index funds. For thematic allocations, one can consider a technology sector fund or some such theme attractive at the time of investment. But do not chase returns.

What is your view on gold? Do you advise investors to include gold in their portfolios?

Though gold has rallied, I see limited scope for gold prices to go up from these levels. Investors should have a strategic allocation of around 5 percent to gold through gold exchange-traded funds and sovereign gold bonds.