We are living in unprecedented times as markets across the globe are in panic mode due to the Covid-19 outbreak. Financial markets are facing one of the worst crises since 1929, as many top economists downgraded their forecasts to point towards an impending global recession. In this backdrop, Moody’s Investors Service sharply cut India’s growth forecast for calendar 2020 to 2.5% from 5.3% estimated barely 10 days ago after the government ordered a nationwide lockdown to curb the spread of the coronavirus.

Equity portfolio

It becomes extremely important for investors to re-shuffle their portfolio according to the current situation. Equity investors can tilt portfolio allocation towards large cap and multi cap mutual funds as in a tough environment, sector leaders with relatively stronger balance sheets, higher earnings visibility, strong cash flows, and management with a good track record should be preferred.

Due to the sharp fall in the equity market, valuation has become attractive as at 1.9x, the Nifty 12-month forward P/B is also well below the historical average of 2.6x (assuming a 10% cut in our FY21 Nifty earnings estimates to account for the disruption due to the global pandemic) and Nifty 12-month trailing P/E of 16.2x at a 12% discount to its long-term average of 18.5x and at levels last seen in April 2014. So those investors who have long-term investment horizon can think of increasing exposure in equity.

Bond portfolio

In the bond space, it would be advisable to have exposure in corporate bond funds / Banking & PSU Debt Funds which are comparatively safer as challenges to the economy is expected to increase only in near future. Corporate bond funds are mandated to invest 80% of their portfolio in instruments with highest rated paper and Banking & PSU Fund typically invests in paper issued by PSU which have sovereign guarantee or paper issued by banks which are relatively safer. At present, most of the corporate bond fund/ banking & PSU debt funds are offering YTM in the range of 6.75% -7.50% which is lucrative in this low interest rate environment.

Gold portfolio

It would also be advisable to have 10-15% of portfolio’s allocation in gold. It performs exceptionally well during stock market crashes. While aberrations like Covid-19 can create short term disruptions, value is fundamentally driven by long-term assumptions. The plummeting of prices has augmented the margin of safety of stocks. At this juncture, it will be prudent to increase exposure in equity in a staggered manner. Empirical evidence shows that investing during market crashes (even if you can’t catch the elusive bottom), can generate super normal returns over the long term.

The writer is Head Research & Advisory, Bajaj Capital