Diversify into US equity funds, but be cognizant of risks

After a severe market correction in 2022, US market indices have made a robust comeback. Exchange Traded Funds (ETFs) based on the NASDAQ 100 are up more than 40 per cent year-to-date.

- Sudipta Mitu

An ETF that tracks the NYSE FANG+ index has registered an increase of 80 per cent. And an index fund based on the broader benchmark, the S&P 500, is up 17.1 per cent.

Trend reversal

In 2022, the performance of US-centric funds suffered significantly due to concerns about high US inflation. There was a belief in the market that the US Federal Reserve would resort to any measure, including aggressive interest rate hikes, to rein in inflation. Exacerbating these concerns was the prospect that the Fed's unyielding stance might tip the US economy into a recession.

Valuations of growth assets such as equities tend to get compressed when interest rates rise.

However, beginning from late 2022 and early 2023, inflation-related fears began to recede somewhat. The financial markets realized that the US Fed's approach would not need to be as hawkish as was previously feared.

Following 10 rate increases totaling 500 basis points, the Fed opted for a pause in June.

Consequently, the Fed funds rate remained between 5 and 5.25 per cent. In contrast to the ambiguity that prevailed in 2022, the market now has greater clarity regarding the scope of rate hikes.