Surfing Through Turbulence

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Surfing Through Turbulence
Devangshu Datta - 07 November 2019

Can you make any sense of Brexit ? Nor can I.

The UK is the second-largest economy in the Eurozone and the sixth-largest in the world. Every form of Brexit that’s on the table will reduce the UK’s GDP by some amount for the next 10-15 years.

India has a strong commercial connection with Britain. Apart from having taken over British companies such as JLR and Corus, Indian businesses have also raised money in Britain. Most have also located their EU headquarters in Britain due to the conveniences of an English-speaking environment. Plus, there are remittances from the substantial Desi population in the country. There are strong chances all that will take a hit. 

If you cannot make sense of Brexit, can you make sense of the USA and China trade war? The tariff war between the world’s largest and second-largest economy is set to continue. It has hurt both nations. The Hong Kong protests have also led to falling GDP in China’s free-market “Special Administrative Zone”.

The tariff war and Brexit are more than enough to trigger slowdowns in the global economy. There are other hotspots such as West Asia, India-Pakistan and the Koreas, where escalation of tensions could lead to sudden economic losses.

Many investors assume that India will sail through this turbulence. But, that’s not true. Trade constitutes up to 41 per cent of India’s GDP. IT companies have issued recent advisories that indicate they are being hurt by lack of demand for their services.

Meanwhile, corporate results show no sign of domestic demand revival and the government seems to be in a denial mode. The rupee is likely to take a hit if the fiscal deficit is larger than estimated in the Budget and that seems given now.

What should investors do under such circumstances? First, diversify your portfolio into other currencies. You are allowed to do this legally and any position denominated in US dollar, or even in Euro, could gain in rupee terms.


Second, take a very good look at whatever equity holdings you have in your portfolio. If there are companies, that show real signs of financial stress or demand weakness, utilise a period when stocks are still high-priced to book profits.  Hold on to only those companies that you are confident of and can last out a downturn for at least another 12 months.

Third, analyse your mutual fund portfolio. Equity-oriented funds will see dips in their NAVs. That’s fine as long as they have good track records. You can continue using SIPs to average your acquisition prices down with a long-term perspective.

Debt-oriented mutual funds could be in flux. In one sense, rate cuts should always benefit debt funds. The Reserve Bank of India has already cut rates several times. But the market hasn’t responded with a surge in debt mutual NAVs. That’s because of a looming crisis in debt markets, with corporate defaults, banks and NBFCs reporting high bad debt and huge increase in government borrowing, which is expected. It is difficult to say how long it might take to sort this particular mess. Do take a look at the portfolios especially of any long-term or medium-term debt you hold.

The other standard diversification in times of trouble is gold. Gold has had a strong bull run, followed by a correction. It’s likely to have another bull run at some stage, given global uncertainties. However, the logic against holding gold is that central banks around the world might go through some quantitative easing, triggering low inflation, when the price of the precious metal will fall.

A brief take on post-Diwali trading may be in order. In general, stock prices tend to fall post Diwali. That’s because households spend their money on annual big ticket purchases and go on holiday, cutting down retail investment. Ask your friends what they are doing. My circle says family consumption has been poor (I’m writing a few days before Diwali). That means money may be available for market investments. If there’s a rally, it would be a good time to resize your equity portfolio by selling weaker stocks into the rally.


The author tracks economic, behavioural and corporate trends, hoping to gauge good avenues of returns

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