How to rebalance asset allocation as stock market corrects

If the Ukraine conflict prolongs, even if at a lower scale, what could be the impact on Indian equity markets? What risk-reward an investor should be aware of if investing at current levels?

From a stock-market perspective, while this event has a potential to cause market-panic, and the extent of damage depends on how the event unfolds, we draw comfort from the fact that equity markets have had a long history of digesting such geo-political events within months and focus on fundamentals there-after. Moreover, we have been expecting 2022 to be a tale of two halves:

In first half, we expect markets to digest the pace of policy normalisation, geo-political events, stickiness of inflation along with omicron issue and hence, would expect it to be volatile.

In second half, we expect markets to respond to earnings direction, as the economic recovery unfolds. Overall, we are constructive on equities in 2022 but prepared for higher volatility in 1H2022. Hence, our advise to investors has been to invest in Indian equities in tranches in 1H2022 rather than in one go. We continue to recommend the same.

What kind of equity funds do you suggest for investors with a lower appetite for risk at the current juncture?

For investors with lower risk appetite, amongst equity funds, we would recommend a flexi-cap fund or a Large & Mid-cap Fund in current circumstances. However, the medium-term asset allocation of the investor should also be kept in mind in this process.

Should an investor rebalance his asset allocation to take advantage of the market correction?

As equity markets correct, we would advise increasing the equity allocation levels, depending on the risk-appetite of the investor and his existing asset allocation.

Commodity prices are surging as the Ukraine crisis stretches into second week. What risk-reward an investor should keep in mind if taking an exposure to commodities/commodity stocks at current levels? 

While most of the commodity prices have flared up in recent times, driven by geo-political events etc., we expect them to be transient in nature and hence, expect the commodity prices to settle over the next 3-6 months, as we watch the developments closely.

Do you expect the US Fed to reduce the pace of monetary tightening due to the Ukraine crisis?

In the light of the recent events, adjusting the pace of monetary tightening is certainly one of the levers that central bankers across the world have, to prevent demand destruction, and loss in economic momentum. We reckon that central bankers are well aware of this, could use this potent tool if need be.

How long do you see the volatility to continue?

Apart from a potential resolution amongst Russia/Ukraine, we think an alternate source of gas/oil could act as a short-term fix for the surging commodity prices in our view, thus causing relief to equity markets.