Standard Chartered downgrades equities to ‘neutral’; suggests asset allocation for conservative and aggressive investors

Even though the markets have already recovered from the massive crash on the day of the Lok Sabha election results, in a recent report, Standard Chartered (StanC) downgraded its rating on equities to ‘neutral’ given near-term uncertainty and stretched relative valuations to bonds and major peers. Moreover, it upgraded the rating for cash to ‘neutral’.

Within equities, the report said, that it remains overweight on large-cap equities given a higher margin of safety in terms of earnings and valuations along with stronger balance sheets to cushion the impact of tighter financial conditions.

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It also sees an improved risk-reward for bonds amid a positive supply-demand balance given India’s inclusion in a global bond index, the government sticking to the fiscal consolidation path, and lower borrowing pressure. StanC is also overweight on medium and long-maturity bonds and high-quality corporate bonds on attractive absolute yields. Gold remains a key portfolio hedge, added the report.

How should investors position their investments in a post-election market backdrop?

The latest electoral verdict is the weakest for the ruling BJP-led alliance since it came into power a decade ago. In the previous two terms, the BJP alone commanded a majority, which gave the party the political mandate to push through wide-ranging reforms.

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However, StanC noted that the government’s continuity, led by Prime Minister Modi, is likely to allay market concerns over policy reversals. The depleted mandate could even nudge the new government to prioritise policies directed towards boosting consumption and supporting the rural economy, supporting growth.

It says beyond the near-term uncertainty, stay focused on the big picture. It has dialed down risk in its Foundation Portfolio given near-term uncertainty on the government formation and stretched valuation premiums.

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Nevertheless, Stan C sees the medium-term prospects for Indian equities remain supported by strong positive drivers. These include 1) GDP growth and earnings outlook remains robust and continues to outpace its major peers. 2) Despite the strong performance in CY 2023, absolute and relative valuation for Indian equities is lower compared to previous peaks amid strong earnings delivery. 3) Stable inflows from domestic investors driven by inflows into systematic investment plans. 4) The pace of foreign investor inflows could improve amid more reasonable valuations, strong earnings delivery, and low foreign investor positioning in Indian equities.

Asset Allocation

For a conservative investor, StanC suggests 25 percent weightage in Cash, 55 percent in Fixed income, 15 percent in Equities, and 5 percent in Commodities (Gold).

Meanwhile, for a Moderate-risk investor, it recommends a 5 percent weight in Cash, 55 percent in Fixed Income, 35 percent in Equities, and 5 percent in Commodities.

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Moreover, for moderately aggressive investors, StanC advocates a 5 percent weight in Cash, 40 percent in Fixed Income, 50 percent in Equities, and 5 percent in Commodities.

For an aggressive investor, it advised a Cash weightage of 5 percent, Fixed Income at 25 percent, Equities at 65 percent, and Commodities at 5 percent.

Finally, for a very aggressive investor, StanC recommends 0 cash weightage, 15 percent for Fixed Income, 80 percent for Equities, and 5 percent for Commodities.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.