THE real dilemma today is how to protect wealth from erosion and make it grow sufficiently to at least beat inflation. The volatility has been unnerving and is not restricted to equities; even bonds have seen swings never experienced before. So much so that there was a run on liquid funds in October as risk aversion touched an unprecedented high. Real estate, which witnessed a price spiral in the last three years, is also a major victim of the market slump. Also, compression of time for market moves means shorter window of opportunity to react. Risk aversion and risk premium is at its peak and investments flows have evaporated.
So does the turmoil in the markets mean that investors remain passive and wait for the troubled times to pass? Inaction may not be the best solution for one’s portfolio. As adages go, “Invest when there is blood on the street, sell when there is greed, buy when there is panic.” These words of wisdom which have stood the test of time suggest well thought–out action even in chaotic times. Investors would do well to adopt a portfolio approach where asset allocation is balanced to provide the right measure of safety, liquidity and return. It is also important that the portfolio mix suits the temperament of the investors so that long term investment strategies remain fairly undisturbed and unaffected by likely emotional and impulsive investor action in trying times.
India, on the other hand, does not have the luxury of either a fiscal or a trade surplus. It, however, has the advantage of large domestic demand driving its GDP. It has the advantage of a young population, abundance of skilled human resource and excellent entrepreneurship, advantages well documented and recognised by global investment gurus. It is less leveraged to global economy compared to any other economy in the peer group of emerging markets. This will help to underpin economic growth at 6-7% levels in the current slowdown and propel to double digit growth when order is restored.
The substantial easing of liquidity in the recent weeks and cut in interest rates are efforts by the government to restore business confidence and spur growth. Given that India will be among the first to bounce back, global capital flows are also expected to come back to India once stability returns to the battered world economy. In a scenario of excessive risk aversion, there seem to be no buyers despite valuations of even good quality Indian stocks having crashed to unrealistic levels. This is a rare opportunity to build a high quality portfolio. The key is to take measured, calculated risk backed by incisive research.
In the current juncture, high quality bonds are also a good investment option in India. There are gains to be made by taking a call on the likely compression of the large spreads between corporate bonds and government securities. There has been a rush to invest in government securities, driven by the extreme risk aversion of investors. This has resulted in a sharp decline in the yields on these instruments. On the other hand, bonds of some of the blue chip corporations — many of them owned by the government — continue to rule at high yields. This is a pocket of opportunity to make superior returns by taking measured risk.
So what is the way to leverage this opportunity? First and foremost, we need to protect wealth from erosion so that we live to fight another day. This means a strict no-no to momentum driven approach and get back to basics.
