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Global investors are fast losing their appetite for risk and risky assets. As much as a net of 58% of fund managers are taking lower-than-normal risk, a record high, surpassing levels seen during the global financial crisis, showed the latest survey by BofA Securities.

Risk-averse fund managers are moving away from equities to relatively safer bets such as cash and bonds. Allocation to equities versus cash has fallen to the lowest level since October 2008. Investors have raised their cash levels to more than 6%, the highest since October 2001, said the survey report. Equity allocation versus bonds was the lowest since April 2009. Also, investors were long on defensives and commodities in July while rotating out of stocks.

Fear factor
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Fear factor

This is not surprising considering that global investors remain extremely pessimistic. Expectations of corporate profits and global growth are dismal, according to the survey. The root cause of all this is inflation, which is yet to decline substantially.

Saira Malik, chief investment officer at Nuveen Asset Management sees more near-term risks for equity markets than for fixed income assets. As inflation continues to squeeze corporate profits, negative earnings revisions may pose the biggest risk to equities in the second half of 2022, she said in a note to clients on 18 July. Simply put, high input costs and the inability of firms to hike prices adequately point to an uncertain earnings growth outlook, making equities more vulnerable.

In the July survey, fund managers said that the prospect of inflation staying high was the top tail risk to their portfolios, followed by a global recession and hawkish central banks.

Global fund managers are bearish on equities across regions, but are most underweight on eurozone equities.

For India, there has been little respite from inflation. Retail inflation in June at 7.01% fell slightly from 7.04% in May. Inflation prints in the months ahead may be more disappointing. Food inflation is likely to be higher because of base effects and seasonality. Second, with more companies passing on the burden of elevated input costs, core inflation would rise. As such, India’s consumer price index (CPI) inflation may inch closer to 8% in August, said Capital Economics.

This would spell more trouble for Indian stocks. “A sustained retail inflation above 8% would have a bearing on economic activity and should worry market participants. Our analysis shows that if CPI inflation were to breach the 8% mark, the India story will deteriorate and India’s valuation premium will see a meaningful de-rating," said Jitendra Gohil, head of India equity research, Credit Suisse. Another fallout could be accelerated selling of Indian stocks by foreign institutional investors. Gohil expects inflation to start falling gradually, but if that doesn’t happen India could see further outflows, he said.

The MSCI India Index trades at a one-year forward price-to-earnings multiple of around 18x, showed Bloomberg data. The MSCI Asia Ex-Japan Index and MSCI Emerging Markets Index are trading at lower multiples of 11x and 10x, respectively. Despite challenging global macro conditions and foreign fund outflows, Indian equities have held up relatively well, trading at a premium to peers thanks to domestic fund inflows.

Kunal Vora, head of India equity research at BNP Paribas, said that so far, consensus earnings downgrades for FY23 estimates have been limited. Downgrades in sectors such as materials and auto are being offset by upgrades in the energy sector, he said. However, if there are meaningful earnings cuts, India’s valuation would likely contract further, he cautioned.

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