In the past few months volatility has gripped the Indian financial market, wiping out gains, leaving investors pondering over questions.... Where to invest in current market scenario? And how to build an all-weather season portfolio?
Clearly, equity markets through the year have been hit by global and macro headwinds, political uncertainty, currency depreciation and NBFC issues, and in debt market interest rates have been hit by negatives concerning fiscal slippage, rising global yields, minimum support price (MSP) hikes, crude price volatility and NBFC-led liquidity. Therefore, from an investor perspective it has been challenging. With equity portfolios being significantly down, debt portfolios would have given lower returns with some credit risk. As on November 30, 2018 year-to-date, the Nifty 50 index was up by six per cent, while NSE mid and small cap index was down by 17 per cent and 31 per cent, respectively.
For most investors where mutual funds are primary investment vehicles, the last year has been tough with large, mid and small cap funds recording on an average negative two per cent, 11.28 per cent and 14.09 per cent returns respectively. The volatility in markets has also hit debt funds where short-term funds in one year has delivered 5.03 per cent, long durations funds giving 2.18 per cent returns and credit risk funds delivering a gain of 4.52 per cent. In such a circumstance, the importance of long-term investing therefore, cannot be forgotten.
Valuations are the key in equity investing. Here, one does see that the excesses remain, and valuations have been volatile closer to average. However, India’s premium to emerging markets is still at 69 per cent, higher than the historical average of 41 per cent.Therefore, it appears that earning growth will be a key determinant of how the markets move. On this front, we are expecting growth moderation in a few sectors, and have recently revised our earning growth estimates for Financial Year 2019 downward by two per cent to 16 per cent. Therefore, our earning estimate at 17 times one year forward points to a 15 per cent upside in markets by March 2020. This means that one needs to build equity portfolios gradually with a staggered allocation, keeping a neutral exposure to equities.
On the debt side, we expect the markets to be range-bound, as expectations on inflation, growth and policy would be function of many determinants. While looking to avoid allocation to duration trades, we will look for opportunities at short-end of the yield curve and pick strategies combining allocation in the one to three years duration basket with an exposure to a mix of quality credits.
On the other hand, we would recommend a new portfolio to have a balanced approach to investing with an outlook of minimum two years and an asset allocation, which tactically would be more conservative than ideal allocations for investors with a balanced profile in such volatile times.
To ensure a healthy return, first, allocate a 35 per cent exposure to equities, primarily through a mix of large and multi cap funds at 15 per cent and hybrid funds with 20 per cent exposure of the portfolio. Secondly, allocate a 50 per cent exposure to fixed income with 40 per cent exposure to accrual, credit funds and structured products and five per cent exposure to equity savings funds. Thirdly, allocate 15 per cent exposure to alternate assets, 10 per cent being in high yielding debt and five per cent being in long-short products. Opportunities in the alternate space is being played via high-yield real estate debt strategies. Empirical evidence suggests that over five to 10 years investment horizons, commercial real estate has outperformed most other asset classes across the globe. A blend of growth strategies, dynamic allocation and fixed coupon ideas should serve well in client portfolios in the alternate space. One must appreciate that investment recommendations and styles are very individual specific and tend to be customized. It is important that investors remain patient and plan a three-year outlook to their investment strategy to optimise returns.
The author is ED and CEO, Reliance Wealth Management