This year, the finance world mourned the loss of Harry M. Markowitz, the father of Modern Portfolio Theory. His philosophy emphasized that a diversified portfolio is less volatile than the sum of its individual parts.

Brinson, Singer and Beebower’s 1991 study further underscored the significance of asset allocation, concluding that asset allocation decisions account for about 92% of a portfolio’s long-term performance, individual investment selection accounts for only 5%, while other factors, including market timing, account for a mere 3%. I’ll delve more into asset allocation as we continue but before that, let’s look at how 2023 unfolded.

The first quarter posed challenges for Indian indices with the Hindenburg research report, the hawkish Fed, and the SVB crisis. The budget sparked hope, laying a foundation for sustainable domestic growth, albeit with the removal of indexation benefits on debt instruments.

As the year unfolded, global events, Fed commentary, Middle-East conflict, and state elections influenced investor sentiment. The roller-coaster ride in equities is expected to continue in 2024, with geopolitics being at the centre of it all.

The Nifty witnessed an upward surge defying H2’s FII outflows of ₹35,000 crore and DII inflows of ₹75,000 crore. Also, on average, we have seen one IPO hitting the Street every day and ended the year with about 230 IPOs out of 246 trading days in the calendar year. This trend of IPOs and deal transactions is expected to continue into 2024 too.

The fixed income space too has seen its fair share of challenges as it was taken by surprise by both the timing and quantum of rate hikes resulting in MTM pressure on debt holdings.Credit risk and liquid funds emerged as the top performers, but overall, median 3-year mutual fund returns struggled to surpass 4.5%. This coupled with high inflation rates since 2019 has resulted in negative savings yield.To quote Vladimir Lenin, “There are decades where nothing happens; and there are weeks where decades happen”. 2023 was one such year where we got to experience a decade’s worth of events in just 365 days, including a war, World Cup, mini-general election, investor activism, and four Fed rate hikes.

Looking ahead to 2024, it is the year of elections in 40 countries, starting with Taiwan in January and culminating in the US presidential election in November.

These elections, encompassing over 50% of global GDP, will shape the geopolitical and economic landscape for this decade.

In the aftermath of the elections, there’s a possibility of profit booking, especially following the impressive upswing in mid and small-cap segments.

For those with a risk appetite, a strategic shift towards large-cap investments might be worth contemplating, while moderate investors could find value in the hybrid space.

The substantial growth in small-cap folios over the past three years positions them on par with their large-cap counterparts.

The Nifty, currently in a fair zone, offers a canvas for potential strategic allocations. Sectors deserving careful consideration include Financials and Information Technology, which, in my view, could be bastions of value.

Within the financial realm, my attention is drawn to corporate lenders and investment enablers within the BFSI sector, representing approximately 35% of the index.

Despite lingering concerns, this sector witnessed modest Foreign Institutional Investor (FII) flows in 2023, a contrast to net outflows in 2022 and 2021. Notably, the sector reached a substantial $10 billion in 2019, marking a significant milestone.

Shifting focus to the Information Technology sector, which has faced a two-year negative trend. It thrives on global stability and low interest rates.

While the latter provides a degree of comfort, it’s crucial to acknowledge that interest rate cuts remain above 2019 levels, and revenue and volume growth continue to lag behind pre-pandemic figures.

India’s position as the second-largest bond market in the emerging market space is a crucial consideration, especially with JP Morgan’s potential inclusion.

In my opinion, this inclusion could grant access to a sizable and steadfast pool of benchmark-driven savings allocation, with projections suggesting potential passive flows of $20-30 billion and active flows of approximately $10 billion over the next 18 months.

Anticipating a ripple effect, other indices such as Bloomberg and Barclays are likely to follow JP Morgan’s lead. Examining tenor-wise data, securities in the 5-10 years range stand to reap the maximum benefits. Coupled with recent central bank commentaries, a consideration for longer durations emerges.

Yields in the range of 6.5-7% for 10-year government bonds could potentially become the new normal, signaling a noteworthy shift in the market’s landscape.

Amidst the news and the noise that 2024 will bring, the essence of investment lies in the wisdom of simplicity – asset allocation. Beyond financial gains, they provide dynamic stability, reduce unnecessary churn, and minimize tax impact through fund-level rebalancing.

Embracing asset allocation instills discipline and emphasizes goal-based investing, essential as custodians of wealth for the next generation.

(The author is Business Head – Professionals- Kotak Private Banking, Kotak Mahindra Bank Ltd)

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