The Indian financial markets have defied all odds and stayed resilient despite macroeconomic uncertainty and the surge in US Treasury yields after the US Fed rate hikes. Amid rising inflation, how will the subsequent US liquidity tapering measures affect the Indian financial markets? Will we face another taper tantrum that severely impacted the Indian economy in 2013? Mr Arvind Chari, CIO of Quantum Advisors, shares some insights on how to plan our investments this new financial year amidst the macro-economic risks in the market.
Amid macroeconomic uncertainty, how is India’s long term growth story? What are the challenges that are present?
There are several macroeconomic challenges that are confronting India such as:
• The RBI (Reserve Bank of India) has raised the CPI inflation for FY23 to 5.7% from 4.5% in February and slashed the growth forecast to 7.2% from 7.8%.
• India’s LPG/Litre cost is presumably the highest in the world.
• India’s Forex reserves fell by nearly $12 billion for the 4th consecutive week to $606.425 billion.
• India’s Current Account Deficit (CAD) increased to $23 billion (2.7 per cent of GDP) in the third quarter (Q3) of 2021-22 from $9.9 billion (1.3 per cent of GDP) in Q2.
Despite all these challenges and the prolonged Russia-Ukraine war, and surging 10 yr bond yields amid a hawkish RBI stance, the Indian currency, and equity markets have remained reasonably resilient. Assuming that the war is not prolonged, we think the medium-term economic outlook for India remains robust given the recovery in various segments of the economy. We are positive on the pick up in the residential property cycle which has a large multiplier on economic activity. We believe that India is on the cusp of an upcycle and if the government spends on its capex plan efficiently, the growth momentum can continue.
However, amid the geopolitical uncertainty, if the crude oil prices remain elevated above $100 per barrel for long, it will lead to an increase in fuel prices and increase the price of goods and services. As oil and other commodity prices go up, RBI may be forced to hike interest rates by 100 basis points, and you might see an increase in long-term bond yields.
How do investors plan their fixed income investments in the event of a rate hike?
So, the best way to play the imminent rate hiking cycle is by adding liquid funds in your portfolio. As the RBI normalises its monetary policy – reduces liquidity and increases the repo rate the yield on the short-term treasury bill goes up, a liquid fund will typically mirror this rise. Since a liquid fund invests only in 91-day paper, the portfolio will be repricing and earn a higher yield. For medium to long-allocation in fixed income, as a substitute to fixed deposits, we believe a gradual SIP allocation to dynamic bond funds over the course of this year will be beneficial over a 3 year period.
Do you think investors need to boost their gold holdings?
Gold is a strategic asset in your portfolio. Investors can add gold from a diversification perspective that will help minimize downside in the event of central bank policy changes or political issues. Gold generally should continue to protect against downfall.
Is there a way to plan our portfolio?
As investors, the one key takeaway is to try and keep your investments simple. While it’s good to know about the markets and the economy, the start of the year is a good time to review one’s portfolio and assess how one’s investments have fared to rebalance one’s portfolio to achieve one’s financial goals
If you look at performance across asset classes globally or in India, you will find that an asset class that did very well in one year typically does not do very well in the next. You need to have allocation across asset classes that help meet your goals. There must be some diversification across Equity, Debt and Gold and everybody needs that diversification to meet different needs. Or you can invest in a broad Multi-Asset Fund that allows the fund manager to change allocations so that you don’t have to time your investments.
For my wealth creation goal, I have set a time horizon of 30 years. This is how my allocation looks like currently:
Allocation: Equities – 65%-75%; Debt – 20%-30%; Gold – 5%
Within equities, I have a diversified allocation across only 3 funds – a Value, a Multi-cap and a small cap fund. I have currently 2 ongoing monthly SIPs. One fund is used for lump-sum and market timing. 3 funds may be less, but my personal investing bias prefers concentration over too much diversification.
Debt – only for safety of capital, liquidity and diversification. I will not take credit risks to try and earn a higher return. I have a 12 month emergency corpus split into Liquid fund and bank savings account which is part of my debt allocation.
Major debt corpus is in a Dynamic Bond Fund. I am comfortable with the long-term risk/return of a dynamic bond fund as against fixed deposits. I do not invest in fixed deposits.
Gold is through ETFs and Sovereign Gold Bond
• Market Timing – This is only to satisfy my urge of taking market calls. I restrict it to less than 10% of the portfolio. I use sector funds and/or ETFs for this purpose.
So, just stick to your primary goals. Do it with as few investments as you can and let your basic investment plan run in the way it is supposed to.
These macro issues that you will see from time to time should not lead to any change in your long-term allocation. These should affect only your short-term investments if at all.
Disclaimer:
Investments in any securities discussed hereinabove are not guaranteed or insured and are subject to investments risks, including the possible loss of the principal amount invested. The value of the securities and the income from them may fall as well as rise. Past performance is not necessarily indicative of future performance.