- September 1, 2020
- Posted by: Kabir
Written by Anil Ghelani, CFA
Head of Passive Investments & Products, DSP and Vice Chairman, CFA Society India
From the onset of 2020, the world has witnessed the biggest healthcare crisis in last 100 years. The crisis has been the biggest threat to social, economic and financial aspects of economies. Since the beginning of the crisis, many countries have seen different stages of lockdown, global trades have been affected negatively, growth has slowed down (global growth is projected at -4.9% by IMF), unemployment levels have increased and consumption and inflation has collapsed. It appears that the entire global economy has slipped into a state of “deflation”. Deflation can cause great problems. The growth engine slows down, negatively impacting income levels for corporates and households and causing lower velocity of trades within an economy. This results in reduced direct and indirect tax collection by the government. As the government’s revenues come down, they need to borrow more, which leads to an increase in debt to GDP ratio and enhanced possibility of sovereign rating downgrade.
Moving from an overall global context if we look at India, different agencies have projected a declining GDP in the range of -5% to -10%. RBI has been watching these developments very closely and has kept policy rates unchanged in the previous policy review meeting of August. The stance continues to remain accommodative, with a clear indication that RBI has space to make rate cuts in the near future. However, the growth trajectory for the year FY-21 is still expected to remain negative. Hence, the RBI Monetary Policy Committee would continue to keep a close watch for a durable reduction in inflation and use this available space to make rate cuts very judiciously and opportunistically to maximise the benefits to underlying economic activity.
Connecting the economy with the capital markets and predicting market outcome, especially in the midst of a pandemic, is challenging to say the least. To assist with that, at DSP Mutual Fund we have used an evaluation process “Vision 20/20” on the basis of which we have currently bucketed our expectations into three sets of sectors with varying clarity on the future path: (1) High Visibility: covering personal mobility i.e. auto, healthcare & hygiene, insurance, affordable housing. (2) Medium Visibility: covering packed food or FMCG, facilities management, manufacturing protective gears. (3) Low Visibility: covering sectors like tourism, hotels & restaurants, commercial real estate, luxury housing.
The world is changing rapidly and radically. Most sectors will recover – some sooner and others later. In anticipation of the recovery of the economy, we have seen a strong rally in equity markets. So what should you do with your money? Consider a mix of large cap via low cost index funds, mid and small caps via active funds, some allocation to global equities, suitable portion in gold and some buffer via debt funds. The best approach would be to make a good financial plan and goals in consultation with your financial advisor and then, invest in the right mix of assets to achieve those goals. You should review your overall portfolio allocation and then depending on your holding period and individual risk appetite, take a call whether to book profits or increase equity exposure. Always remember to keep ‘Irrational Exuberance’ in check – do not rely on emotions, the numbers must support and back up the rationale behind the investment.
The way financial markets have moved in the recent past is a reminder that it’s practically impossible to predict markets from a short-term perspective. Keeping a long-term horizon in mind, sensible and smart choices would lead us to our goal. Ultimately, the rewards would be celebrated. I always get inspired by Mr. Bachchan’s message from KBC – ‘Ade Raho’, i.e. keeping moving till you reach your goal.
Disclaimer: “Any views or opinions represented in this blog are personal and belong solely to the author and do not represent views of CFA Society India or those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated.”