A staggered investment into different asset classes is what investors should consider
The opportunities that different asset classes are offering reinforces the importance of asset allocation
It may be difficult to believe that this may be a good time for investors to invest with the red splashed across stock counters one day and wildly swinging markets the next, a bank being put under moratorium, an instrument that was seen as a safe option suddenly becoming riskier than equity and losing all its value, the global economy in a tailspin and a pandemic that shows no signs of abating. But if you look beyond these very real and very significant issues there is an investment opportunity for investors across asset classes. However, this is an opportunity that should be exercised with caution. We look at what the current situation means for your equity, debt, gold and foreign currency assets and how to handle your investments at this stage.
The Indian stock markets saw the largest absolute single-day fall on Thursday, 12 March, 2020, with the Sensex losing 2,919 points and the Nifty, 868 points. Investor wealth of almost ₹11 lakh crore was wiped out in a single day. The fall was led by global markets that were spooked by a fall in crude oil prices as the Organization of the Petroleum Exporting Countries (OPEC) and Russia failed to strike a deal on cutting oil production and the continued spread of the Covid-19 pandemic. While the correction brought a much-needed relief to stock valuations that were seen as stretched for some time now, the question remains on the course of action that investors should take with their equity investments. “The speculative bubbles are all being busted across large-, mid-, small- and micro-cap segments and a secular clean-up of the earnings premium has happened," said Shyam Shekhar, founder, iThought Advisory. But is it the right time to buy?
While there is little doubt that it is a good time to invest, retail investors should consider the possibility that the market may see some more correction. Renu Maheshwari, principal advisor, Finzscholarz wealth managers LLP, believes this is a good time for investors to move into equity. “We are looking at deploying money over the next 6-12 months," she said. She is, however, wary about lump sum investments at this stage. “The market is very fragile and any little thing can spook it. Our investors are more comfortable with a lower risk strategy and that is why we recommend periodically investing in the market, even if it means a slightly lower return", she added. Shekhar believes that investors should use their investible surplus through the year to make corrections in the skewed portfolio allocations to the large-, mid- and small-cap segments, so that there can be a better participation in the economic recovery when it happens.
Debt continues its supporting role
“The returns from debt funds in my investors’ portfolio has helped balance out the fall in equity holdings," said Maheshwari, to support her contention that despite the good run fixed income markets have had in February, 2020, the conditions continue to be good for debt fund investors. Lakshmi Iyer, head, fixed income, Kotak Mutual Fund, agrees. “Debt investors need to stay calm and be patient. The 10-year yields had declined to a low of 5.99%, and though we have seen bond yields inch up in sympathy to the rising bond yields in the US and on account of selling by foreign institutional investors, I don’t think that those invested in the rates market need to worry, and should stay the course," she said. Debt funds reaped the benefits of a tight fiscal deficit target in the budget and innovative monetary policies such as the long-term repo operation in February. But the sharp correction in oil prices and a concerted move by central banks around the globe to cut base interest rates in an effort to provide an impetus to economic activity, affected by the coronavirus pandemic and the retail inflation coming in lower at 6.58%, lays the case for a rate cut by RBI and provides the base for debt markets to continue to provide good returns for the investors. “The interest rate scenario in the country is likely to remain benign and the chances of a rate cut is only increasing. A rate cut plus liquidity infusion in the system to ensure some calm in the market is the need of the hour," said Iyer. While long-term bond funds will benefit the most from a rate reduction, strategic allocation to debt for investors should continue to be in short-duration funds that see lower volatility. Investors who are comfortable with volatility in their debt portfolios may consider investment in long duration funds. “On a risk-adjusted basis, short to medium term has a better chance of unlocking value at this stage. The short duration, PSU and bank funds and dynamic strategies for a one to five year band will be a more prudent, risk-adjusted way to position allocation to fixed income," said Iyer.
Gold shines in periods of uncertainty
With gold touching all-time high prices against most currencies, with the exception of the dollar, the case for gold continuing its run seems certain given the uncertainties surrounding the economic impact of the Covid-19 crisis. With equity markets in a tailspin and as investors take a step back from risk, gold becomes a safe haven which attracts money and sees demand drive up the price. Central banks are expected to continue their efforts to keep the monetary situation accommodative and gold is expected to benefit from the low or negative yield scenario, since it is not an interest-bearing asset and the opportunity cost of holding it, relative to interest-bearing debt instruments, comes down.
It appears that 2020 is going to be about the impact of coronavirus pandemic on gold and other asset prices. On 10 March, the 10-year US treasury yield fell to a new low of 0.93%. Reportedly, this is the first time that the benchmark yield has fallen below 1%. The interest rate cuts by the Fed and more accommodative global monetary policies are likely to reduce the opportunity cost of holding gold," said P.R. Somasundaram, managing director, World Gold Council, India. “Gold will continue to shine with its safe haven properties as anxieties abound. However, a determined and coordinated response by governments to tackle the fall-out may bring in a measure of balance once the situation stabilizes," he added.
An adequate allocation to gold in an investor’s portfolio shows the benefits of diversification it brings to a portfolio in periods like this. “We believe that an allocation of 5-15% to gold in a portfolio increases returns and reduces volatility. In situations like the current one, a higher allocation may be necessary, depending upon one’s portfolio risk weightage and liquidity needs," said Somasundaram. His advice is to hold exchange- traded funds or gold bars and coins at these prices for investors as these carry lower conversion charges. Sovereign gold bonds also offer a good investment opportunity to benefit from gold price movements.
If anything, the fall in equity markets and the opportunities that different asset classes are offering reinforces the argument for asset allocation to be the cornerstone of any investor’s portfolio. Investors should build a portfolio that is diversified across asset classes such as equity, debt, gold and others, and reflects their goals and risk profile.
Staggered investment in the different asset classes is what investors should consider, even if they have surplus cash, to manage risks of possible declines from these levels. “You have a reset in costs today. But you don’t know what the reset in earnings will be. It will take at least two quarters for the market to decide what is the right valuation wherever the costs have got reset. If there is no consistency in the earnings trend over the next two quarters, markets may continue to be undecided if the bottom has been formed", said Sekar.
Don’t go overboard on equity if you will not be able to give the economy and the markets the time to turn around and grow. Investing with the expectation of making a quick return is a risky move, given the uncertainty regarding how long it will take for the pandemic to subside and economies to recover. Investors willing to take some risk of volatility and uncertainty could make a tactical call of going overweight in equity and using a combination of lump sum and periodic investments, but this should only be done after some visible and concrete signs of stabilization become apparent.
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