The markets have seen a rally worldwide. The global markets have risen more rapidly than Indian markets and there is that temptation to look at global asset allocation. Let us examine the contours of the way ahead.
The markets are predictors and not reflectors. The question is “What is making the markets go up? It is a mix of liquidity by Central Banks and the fact that banks cannot lend freely to business in the absence of demand is making the liquidity fill up the markets. The Indian markets saw an excess inflow in June and that is continuing for now.
In our country the digital way of working is not ingrained and though it is picking up demand may not go up in the near future the markets have discounted this reality. The developed world has picked up in the interim especially the European and the US economy as they have been used to a digital work ethic for a couple of years. However given their constraints on population and thus a limit on future demand the outlook remains a range bound situation over the medium term on account of demand constraints. In the near term the funds available from their governments are likely to help maintain the demand.
What is the road ahead for our country?
The service sector will see a hit of at least 30% for the year if not more as most decisions are done by people when they meet in person. This may however see a reversal of demand dynamics post the availability of the vaccine. As per latest developments we are likely to see a solution in the international sphere if the Russian Scientists succeed as they claim.
In the traditional manufacturing and trading pieces of the economy one is not seeing an off take of demand as the trust deficit is high, except the segment which is in the covid prevention space. Apart from key business relationships most businessmen are not extending credit which is causing a contraction in demand on the ground. Most payments have been stuck and it is unlikely that any time before November things are likely to stabilize on the cash flow parameter for these industries.
On account of the onetime restructuring option given by our Central Bank many businesses may choose to restructure or close down. This may hamper consumer demand in the hinterland. The silver lining in the entire situation is the normalcy of rain which is likely to sustain rural consumption at a basic needs level. Given the current situation it is data, food and medicine which occupy the top of the mind frame. The Government has also extended food support at the ground level till November 2020.
The tax collections are improving which suggests that a pick up is gradually happening. There have been contractions in the infrastructure spending and although a challenge remains in terms of banks unwilling to look at infrastructure projects we are likely to see traction in the last quarter of the year.
What is the right strategy going forward?
The markets are reverting to the old levels. Given the fact that most provisions have been made by Banks across the board and Major systemically important banks have raised capital the chances of the stability of the Banking system being impacted is slim. Bank Nifty is more likely to spearhead the economic recovery as Capital raised would be deployed to grow the Loan book.
The gains going forward are likely to be reflected in sectors where earnings visibility is there such as Telecom, pharmaceuticals and chemicals.FMCG on account of higher valuation has not seen a price rise as has been witnessed by other sectors.
Concentrated strategies working on the recovery theme are likely to work better if you are an investor with a long term view. There also one can additionally mitigate the impact of investing lump sum in terms of a price risk to avoid the downside is by way of a systematic transfer plan. Here the funds are parked in a liquid fund and then transferred to growth assets over a period of time which could range from a month to a year.
If you are an investor who is looking at preserving the hard earned wealth long short strategies which have a net exposure of less than 50 would be relevant for your thought process.
What is net exposure?
100 rupees is the value of the portfolio.70 is a long only part of the portfolio and 30 is a short part of the portfolio. Therefore the net exposure is 40.This is for a non-leveraged portfolio. At times the portfolio is leveraged and the calculation would be different as is the case with many aggressive strategies.
If you are going beyond that net exposure then chances are that you may experience the volatility levels similar to a long only fund which may not help as much if you are looking at mitigating risk at a portfolio level across market cycles.
The markets in 2020 are seeing a recovery and a steady rise going ahead. Are you ready to align with the times?
Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.