In times of uncertainty, higher inflation, and lower growth prospects, a few points emerge that can help us guide our asset allocation.
In perhaps the most significant event to occur in recent memory, there is a sense of ‘all bets are off’ amongst investors. In these uncertain times, it becomes important to go back to basics – keeping our heads on our shoulders and prioritizing our individual needs in our investment journeys.
With the crisis still being played out, there are new paradigm shifts occurring by the day. Will cost-cuts, layoffs, work-from-home finally herald accelerated automation across all spheres? Where is the value going to lie in this chain? Understanding this is important to understand where the productive assets are going to lie in the future.
Equally, another reality is the globally increased debt load. High levels of debt could push productivity down for future generations responsible for repaying back this debt. One thing is clear – inflation world-wide could be headed higher. This is in the backdrop of lower expected growth. Even if we ‘science’ it out with a vaccine, we are far from getting the whole world vaccinated.
In this context of uncertainty, higher inflation, and lower growth prospects, a few points emerge that can help us guide our asset allocation. These points could be equally applicable individuals across the wealth spectrum.
1. Emergency Funds: Till we are able to wrap our heads around the uncertainties facing the world, it makes sense to have at least 6 months to a year’s worth of expenses saved for emergencies in cash and equivalents. There are no guarantees on where we could be in this crisis even a couple of months down the line. This includes increasing our savings rate. Deferring needless expenditures and prioritizing essentials is a good mindset to follow till the world is normal again. Funds for any expenses due in, say, 3-4 years must be kept in Fixed Income assets like FDs or high-quality short-duration bond funds.
2. Productive Assets: If we want to benefit from Productive assets and beat inflation, we are automatically referring to equities here with a long-term mindset (5 years and more). Here the mindset should be to buy businesses which can be profitable and grow despite the lockdown. So companies with low capex, high ROEs and high margins and services which benefit from Covid like telecom, health insurance fall in this basket.
3. Defensives: By defensives we mean survivors who can swing the crisis to their advantage. There is a greater chance of an HDFC Bank adding the next 1 lakh crore in market cap in the next 3 years than a small cap company. Not just any large cap, but leaders in their sectors. Consumer facing businesses – say sectors like packaged food, high quality banks, two-wheelers, non-discretionary appliances, pharmaceuticals could fall in this bucket.
4. Inflation Hedges: We are talking about Gold here, which is typically a non-productive asset (no cash flow, no dividends) yet the only function it provides is that of a hedge against inflation. Some allocation (< 10% of portfolio) in gold makes sense if we already don’t already own it in physical form.
5. Buy Protection: Despite a recency bias from the current crisis, it is always wise to buy insurance – term life and health – to provide for balloon payments when they are really needed. With survivability topmost in everyone’s minds, insurance is a must in the current context.
Finally, as we search for income and growth in a world starved of both, we have to focus on the costs we are incurring to manage our investments. Over a period of time, these costs compound significantly. This can be balanced by a bit of education about the various products and investment options available in the market. A self-directed approach with the help of an un-biased advisor is a better proposition than buying expensively managed products with no guarantee of returns or riding out the next crisis.
(By Siddharth Panjwani, Chief Strategy Officer, Pickright Technologies)