Asset Allocations & Strategy

Asset Allocations & Strategy

Asset Allocations and Strategy


We have been hit with a health crisis which most of us have never seen before.

While 2008 crisis was a financial crisis which had only impact of one segment (Financial System). The fears then were that the financial crisis will seep and impact the normal lives of people and the real economy.

The current healthcare crisis due to Covid is one where the impact is directly on the lives of people and the real economy. This also seeps into the financial system given the costs to lockdown and the changing economic scenarios and way of doing business.

This raises many challenges for individuals and the system alike as

This leaves us with responses that one can take to help navigate through the uncertainty thereby at least reducing the financial damages. These are good even for normal times though the same gets further magnified during such situations.
1. Individual Asset Class behaviour
Fixed Income Markets

Yields have come off significantly over the last one year. The RBI was on a rate cut cycle which got further accelerated due to the Covid crisis. This led to the near- term money rates coming off by 3% as against the RBI rate cuts of 1.75% over the last one year. The longer end of the curve has also seen the downward trajectory. The steepness of the near- term rates compared to long term rates is high. A tabulation of the yields across different durations are as below

Fixed Income Markets

Equity Markets


BSE Sensex moved from 27000 in 2015 to a high of 42000 in Jan 20. The index corrected sharply as it got to price in theCovid crisis and moved to a low of 25981 as on 23 March 20. The index has since recovered over the last two months to 34000 as on date. However, there has been sharp divergences in recoveries of individual stocks. The largest recovery has been in consumer names and Reliance which moved to a leadership given the monetisation of the telecom subsidiary.

Indian rupee continues on its depreciation trends though with lags. INR depreciated to the dollar sharply in 2020 despite the low current account deficit and significant amount of foreign exchange reserves built by the RBI. The movement has been in line with the emerging market currencies and a flight to safer assets given the uncertainties around.
Equity Markets

International gold prices have been on an uptrend ever since the US Fed started reducing rates in 2019 and subsequently increasing its balance sheet size. The movement has further accelerated post the Covid crisis in March due to uncertainty and large amounts of monetary stimulus by various central banks.

2. Key Challenges Investors Face
Loss of equity values

While the frontline index is holding up there is significant gaps in individual portfolios based on the constituents and exposures to various sectors. This will continue to grow as we go forward.

It becomes difficult to actually quantify the real loss of economic value within different segments of the economy as the following is yet to be fully reflected. i.e.

Lower Rates of Interest or limited safer alternatives
Given the flight to safety and the significant rate cuts by RBI the post – tax yields on fixed income has come down significantly. This can be seen in the yields on the overnight/ liquid category. Most banks have brought down both the deposit rates as well as savings account rate.
Uncertainty and Estimation Errors
Irrespective of any forecast numbers or models the actual scenarios for any estimate on either how the health crisis progresses or critical economic numbers such as growth or inflation will be prone to significant errors. The longer the period of the health crisis the more the error swings. This can cause large deviations in values for any long- term investor.
Financial Instability due to fiscal and monetary numbers moving outside normal ranges and requirement for continuous government support

Given the nature of the crisis there has been significant levels of monetary stimulus provided by Central banks. The Government finances also are under stress given the revenue numbers will be significantly lower while expenditures are required to be carried out to cushion both economy and weaker sections of society.

While there is no debate that this is the need of the hour and rightly instituted. Such measures over time can lead to financial system instability. In simple words whenever in an Indian scenario there has been imbalances on government spending and printing of money, we have had high levels of inflation and spurts of rupee depreciation. This cannot be underestimated.

Forces of creative destruction

This is a factor that investors have to very mindful about during a crisis scenario. This will be from the fact that some portions of the economy will never come back to the old normal and patterns of income and expenditure as the economy shifts.

In simpler words the current trend of technology replacing labour or higher work from home or lower social gatherings changes the nature of business activities pre and post covid. This can change the gainers or losers among economic agents and accordingly one needs to be highly alert to the same.

3. Concluding Points to help Navigate the Current Environment
Asset Allocations
Ensure high level of discipline between safer assets and risk assets. A fully allocated portfolio will have no ability for manoeuvring in case of errors. Hence cautious optimism will be more helpful than swings towards either risk assets or safe portfolios.
Sufficient levels of liquidity to capture any opportunities that come by the way
Diversification between asset class
Diversification into real assets mainly gold is warranted given the level increase in the monetary base being affected. As compared to holdings in land or other commodities gold has a long history of store of value, ready acceptability and liquidity that it offers.
Review and weed out the losers early
Given the changes that one will see constant monitoring and weeding out the losers will help a long way.
Continuous search for fund managers or direct investments
That will help preserve value over time.
4. Market Views
Fixed Income

There is steepness in the yield curve besides a large gap between AAA and non AAA securities given that investors have risk aversion as well as uncertainty. We believe that the RBI has left some room for further rate cuts which will be used to push rates lower provided that there are no adverse external account shocks. In simple words there will be gravitational lower rates provided that the foreign investors do not liquidate their holdings or there is a high level of demand for imported products impacting the balance of trade.

Our view would be to focus purely on AAA assets with a mix of longer maturity roll down portfolio that forms core fixed income and the short maturities for ensuring liquidity as well as reducing the downsides for any adverse movements on interest rates.

Bucketing with higher focus on capital preservation would significantly aid in construction of the fixed income portfolios.


This is an asset class that one cannot avoid given that fixed income investments will not be able to match the purchasing power loss over time.

Our view on Indian indices is that they are holding up due to high level of liquidity infusion by Central Banks and lack of alternatives. However, there is a shift in the constituents with some segments severely beaten down.

We do not believe there will be a large- scale rally and prefer to be with larger names and more resilient segments of the economy compared to business which will need to be constantly supported to survive.

We will see a large number of zombie firms whose equity values will be traded on hope that these will come back if there is a large scale economic improvement. Hence, one would need to be selective in terms of allocations to fund managers or picking up direct investments to ensure that the segment provides the necessary kicker to the fixed income returns.

We would advocate to diversify equity holdings even geographically to ensure that there is exposure to firms that are a part of our expenditures while not being listed in the Indian equity markets.

We expect gold prices to continue be buoyant with investor allocations increasing due to insurance from inflation or loss of purchasing power. International prices will be determined by the level of intervention the US Fed will need to do to support the economy besides dollar weakness. We would advocate gold allocations into portfolios to balance out risks among various asset classes and as an insurance. We would not want to take a call on the price trends as this will be very volatile and has already risen substantially.

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