In an interaction with Ashish Patil, Head of Product and Strategy, LIC Mutual Fund Asset Management Ltd

In an era of evolving financial landscapes and ever-changing market dynamics, investors must understand the significance of strategic asset allocation, emphasises Ashish Patil, Head of Product and Strategy, LIC Mutual Fund Asset Management Ltd

What is your general evaluation of the current market situation?

Nifty 50 had crossed the 18600 mark two times in the last two years: One in October 2021, and the other in Dec-22. During both times, valuations, crude prices, inflation, and current account deficit were relatively high as compared to current levels. The current market rally was maybe due to an improvement in the macroeconomic factors of the country. India is the fastest growing in the world and hence may be trading at premium valuations relative to the rest of the world. 

For the March 2023 quarter, India’s GDP growth stood at 6.1 per cent compared to 4.5 per cent for China (USD 18 trillion GDP), 4 per cent for Brazil (USD 1.6 trillion), 1.6 per cent for United States (USD 23 trillion), 1 per cent for the Euro Zone (USD 14.5 trillion) or 5.0 per cent for Indonesia (USD1.2 trillion), 6.4 per cent for Philippines (USD 0.4 trillion) and 3.3 per cent for Vietnam at USD 0.4 trillion. Having said that I think that the current growth rate of the Indian economy is still not reflecting its true potential.

What are the three sectors that you think appear promising and offer the potential for investment in the long term?   

From the long-term perspective, the 3 sectors which have done well historically in the past for India are IT, Banking & Finance and consumption. Currently, we are positive on Auto, BFSI, Capital Goods and export-led manufacturing sectors. Some of the consumer-facing companies have also seen valuation normalizing during the recent market corrections, which can be looked at. I am cautious about sectors which have high government interference because of upcoming elections.

How do you anticipate equities to perform over the next 6 months? What are the major downside risks?

I strongly believe stock markets follow a Brownian motion where asset prices are changing continuously over very small intervals of time and the position, namely the change in price of the assets, is being altered by random amounts. If you look at the 1-year returns of Nifty 50 TRI for the last 20 years, it ranges between 56 per cent to 108 per cent. Hence, it's very difficult to predict the performance of the market over a 6 months time frame. 

The major downside risks are lack of sufficient monsoon, earnings downgrade, and global scenarios like high inflation, recession, geopolitical tensions etc. I believe the bulk of the drag on the markets due to high inflation and high-interest rates is behind us. However, the double whammy of inflation/higher price levels and high cost of capital are resulting in demand slowdown and sluggish economic growth. For the recently concluded March 2023 results season, earnings downgrades were much less than what the market feared. In the quarter ahead the returns from Indian equity markets will be governed by how this equity downgrade cycle plays out.

In the current market conditions, what asset allocation strategy would you suggest for investors?  

In an era of evolving financial landscapes and ever-changing market dynamics, investors must understand the significance of strategic asset allocation. The choices we make regarding the distribution of our resources across various asset classes can have a profound impact on our long-term financial well-being. 

Investing solely based on the asset that has generated the highest returns or lowest risk may not be the most effective strategy. This is where asset allocation comes into play, as it becomes crucial in determining the optimal distribution of investments across various asset classes. By diversifying one's portfolio, investors may mitigate risk and potentially achieve returns over the long term.

It’s very difficult to create a generic strategy: one size fits all, as the requirements, risk profile, and investment horizon of the investors vary from case to case. For short-duration investments, investors should predominantly rely on short-term debt instruments as they have lesser volatility as compared to other asset classes. One of the strategies for long-term investments which investors may adopt is: an investor may have a 50-50 allocation to debt and equity which may be rebalanced on a yearly basis. This strategy will help investors mitigate risk and potentially achieve returns over the long term.