Investment Conundrums Amidst A Crisis
Founder and Managing Partner Pranitya Wealth Advisors
The corona virus pandemic hit India in late March 2020, especially at a time when some green shoots were starting to become visible through the first two months of the year. Economic activity had started picking up on the back of single-digit earnings’ growth seen over the past six years. No one got adequate time to assimilate and comprehend the situation. Naturally, this was more of a medical issue and more importantly, we haven’t seen a pandemic of this magnitude in the recent past. Given this setting, it is pointless to compare the current market conditions with the previous large market correction especially that of 2008 as the underlying economic situation is different this time.
Although the market valuation was not in the froth zone, the ability of corporates, individuals and the government to fight the current slowdown is due to deterioration of their finances. Corporate debt has considerably increased due to low earnings’ growth of sub 10 per cent level for the last 6-7 years. India’s gross savings rate dropped from 37 per cent in 2008 to 30 per cent in 2018. Indian GDP was in the zone of 8-9 per cent in 2007-08, which is no longer the case. Hence, this time around the government will have to do the heavy lifting.
In my opinion, we tend to react only when we believe that the impact is permanent and not temporary in nature. When it comes to the fallout of the pandemic, I believe some of the negative impact is likely to be somewhat permanent in nature. This is because as discretionary spends come under pressure due to instances such as job losses, sectors such as real estate and tourism will undergo massive change. The recovery for each of such sectors may take longer than expected. Further, there will be a few structural changes which will force us to adapt to this situation. Thus, the debate on the shape of the recovery (U,V,W) is meaningless as from here on any recovery will mostly depend on government response and stimuli.
Considering these frequent disruptions, the very construct of long-term portfolio has become a challenge. Though these types of wealth destructive events happen once in a decade, the impact lasts much longer. Also, such events tend to wipe out all the gains seen over the past several years in equities as an asset class. Specifically, in terms of the present situation, the gains of the last five years have come undone. As a result, the India story is certainly challenged today, but not destroyed. We are a domestic economy, where just 15 per cent of GDP comes from exports and our share in global trade is close to only 2%.
There will be short-term headwinds as foreign portfolio investors (FPI) withdraw their investments, some of which has already started playing out with FPIs having withdrawn over Rs5,000 crores in April 2020. Going forward, it will be quite some time before sovereign wealth funds from the Middle East make a comeback. Also, there are reports that long-term pension funds from Canada and the US have kept their India investments on hold. With the market mostly relying on the steady inflows from domestic institutional investors to counterbalance the outflows, it is very likely that the Nifty could be in the range of 8,500 to 10,500 for this year. As the global liquidity improves, there is a possibility of foreign inflows coming back to India with an eye on the potential future growth.
Current Investment Conundrums
There are four important aspects when it comes to managing wealth in this type of volatility.
1. Asset Allocation : Lack of discipline in terms of asset allocation is far too common as portfolios are hardly aligned to a client’s risk profile or return expectations. It is important to remember that asset allocation is the backbone of any investment strategy and it is not static in nature. The allocation to various asset classes needs to be adapted in line with market forces. The optimal way to address this is through dynamic asset allocation schemes. Such schemes dynamically rebalance equity and debt exposure in order to help navigate through market vagaries.
2. Concentration : Most often, portfolios tend to be overweight on instruments or asset classes we are most comfortable with. This is mostly on account of sentiment, past returns or legacy. Allocating too much to a specific fund manager or an asset class or even a share could prove to be a portfolio debilitating move. A portfolio should be diversified in nature as it naturally renders downside protection.
3. Liquidity With frequent disruption seen over the past six years, it is apparent that portfolio liquidity is important. Often investors tend to lock up cash in investment products which can be avoided.
4. Reviews and Actions : When we are going through a structural change, reviewing the portfolio becomes very important. The current situation may require one to go back to the drawing board and completely overhaul one’s portfolio. In such a situation, taxation and exit loads consideration should take a back seat. Aligning portfolios to the new realities should be the aim.
During uncertain times, investors tend to exit equities and deploy money in bank deposits. Such a move may not even beat inflation and is only likely to offer psychological solace in the short term. One has to remember that in a growing economy like India equity investments will deliver superior returns over other asset classes. It is advisable to maintain neutral weight to equities as liquidity may drive the market ahead of its fundamentals.
The writers is a Founder and Managing Partner, Pranitya Wealth Advisors Email id : email@example.com