Equity market valuations are broadly reasonable adjusted for the cyclical low in earnings and potential for revival going forward.

We remain bullish on equities from a medium to long term perspective.

Investors are suggested to have their asset allocation plan based on one's risk appetite and future goals in life.

Indian markets continued their downward trajectory with a 3rd month of investor pessimism in line with global markets. Globally, Hong Kong (-9%), Brazil (-7%) and US Dow Jones (-4%) saw the largest drawdowns while Taiwan (+2%) was an outlier. Investors' concerns around hawkish policy stance by central banks, resurgent geopolitical tensions and sharp moves in select stocks where corporate governance issues remain in the limelight were prime reasons for the volatile month. S&P BSE Sensex & NIFTY 50 ending the month down 1% & 2% respectively. Mid and small caps also trended in line with NIFTY Midcap 100 & NIFTY Small cap 100 ending the month down 1.8% & 3.6% respectively. FPI's continued to remain sellers in the Indian equity markets on concerns over market valuations and geopolitical risks.

Source: Bloomberg. The above graph is used to explain the concept and is for illustration purpose only and should not used for development or implementation of an investment strategy. Past performance may or may not be sustained in future.

GDP growth for Q3 FY23 moderated to 4.4% well below market consensus expectations of 4.7% driven by weaker-than-expected growth in private consumption and decline in government consumption. Drag from lower net indirect taxes also contributed to the downward surprise. The domestic demand-side breakdown showed that gross fixed capital formation rose the fastest (at 8.3% YoY). Further, net exports were less of a drag, since imports moderated more than exports. This was widely expected and has confirmed estimates basis high frequency indicators. Retail Inflation surprised on the upside with inflation for January 2023 at 6.52%, well above the RBI's upper band. We believe both inflation and rates are peaking and inflation should now soften gradually in line with lower commodity prices. Interest rates are likely to remain stable from here on given the gradual build-up of stress in the economy as borrowing costs rise. India's current account dynamics are changing as rapidly on the way down as they did on the way up. Recall, the CAD in the July-September quarter doubled to a 9-year high of 4.4% of GDP. Since then there have been significant improvements. The January trade deficit narrowed to a 12-month low of $17.8 bn from a $26bn average in the July-September quarter. The real story however has been the continuing positive surprise on the services side, with the new-found buoyancy on service exports only getting stronger. With this, the current account is on course to printing close to balance in the current quarter. This could provide much needed support to the INR. Since the start of the year, markets have become more sanguine as winners of last year - momentum and beta have given way to fundamentals and quality. The limelight on corporate governance has also brought back focus on companies with a proven management track record and profit pedigree. Many of these names today trade at attractive valuations in contrast to the rest of the market. The winners of 2023 is likely to look starkly different from 2022. This coupled with buoyancy on the economic front bode well for investors looking to build a highly quality centric portfolio. Currently, our portfolios favour large caps where companies continue to deliver on growth metrics. Corporate earnings of our portfolio companies continue to give us confidence in the strength of our portfolio companies. From a risk perspective, in the current context, given rising uncertainties our attempt remains to minimize betas in our portfolios. The markets have kept 'quality' away from the limelight for over 18 months, making valuations of these companies relatively cheap both from a historical context and a relative market context. While we remain cautious of external headwinds, strong discretionary demand evident from high frequency indicators and stable government policies give us confidence that our portfolios are likely to weather the ongoing challenges. Markets at all-time highs also point to a valuation risk in select pockets which we will look to avoid.

Source: Bloomberg, Axis MF Research.