We would deploy capital on moves lower between now and the election, with additional allocation post the election should markets deliver a surprise verdict.
By Sunil Sharma
Domestic flows into equity funds are stumbling. There’s a new set of losers every decade—1987, 1998, 2001, 2008 and 2018. Young urban Indians were recent entrants in equities, lured by tantalising returns, particularly in mid and small-caps, and persistent industry marketing.
Maybe an equity wealth effect exists in urban India, as consumers have pulled tight their purse strings on financial investments and big-ticket purchases, in the face of governance scandals, funds siphoning, manipulation, greed and corruption. The market has taken the role of judge and jury, firing first and asking questions later. Promoter and investor wealth have been destroyed in hours. It has been a minefield, and even the savviest investors in India have taken hits to their portfolios, and over the course of the past year, small and mid caps have now become the new untouchables.
Around 804 of 1,180 stocks or 67% of stocks are down 30% or more from their 52-week high. Similarly, 559 stocks are down 40% or more from highs. There is limited clarity on what the short term holds, and it is possible we have volatility ahead and further negative surprises. One cannot underestimate the ability of the unscrupulous few to pull the rug out from under the unsuspecting many. Such is the nature of financial markets, at home and abroad. But the level of negativity, pessimism and aversion suggests that we are somewhere nearer the trough. Earnings are growing for the majority of the market and this, alongside central bank accommodation will provide markets relevant support.
There is no longer an edge in information, and it’s becoming fairly clear there is limited consistent edge in analytical ability. The only edge then becomes a longer-term investment horizon, and an ability to take advantage of behavioural opportunities. Tactical asset allocation remains the largest potential source of alpha.
Diversification and thoughtful asset allocation remain the key pillars of strategy. We would deploy capital on moves lower between now and the election, with additional allocation post the election should markets deliver a surprise verdict. We prefer quality growth, diversified portfolios at reasonable valuations. We also think the deep aversion to mid and small caps spells contrarian opportunity for the smart investor that has the ability to be patient, average down in coming weeks, and hold for a three-year horizon.
Fixed income strategy
Debt fund managers with fiduciary responsibility have sacrificed security of principal in the reach for incremental yield. Short-term and long-term rates had headed higher leading to the IL&FS default. The market does not appear concerned about rural relief stimulus, as the 10-year G-sec now sits near recent lows. Rather, the action suggests that the market is stabilising. With IL&FS, one would expect most banks and NBFCs have gone through their counterparty exposures with a fine tooth comb. However, fear remains palpable amongst investors, and worries about financial contagion abound.
Nevertheless, uncertainties in the short term need to play out, and worsening credit conditions remain a risk. In such a scenario, we favour the short end of the curve, higher rated, clean credit, short duration and/or liquid, until risk is clearly clari·ed. We also prefer exposure via principal protected structured strategies with upside participation.
The writer is chief investment officer, Sanctum Wealth Management. Edited extracts from Sanctum Wealth Management’s Investment Strategy