DAILY VOICE | Can allocate 5-10% of portfolio towards global investments: Anil Ghelani of DSP Investment Managers

A good financial plan is one in which one can consult a financial advisor and clearly write down their goals and then, invest in the right mix of assets to achieve those goals.

The way financial markets have moved in the recent past is a reminder that it's practically impossible to predict markets from a short-term perspective. Keeping a long-term horizon in mind, sensible and smart choices would lead us to our goal.

Ultimately, the rewards would be celebrated.  I always get inspired by Mr. Bachchan’s message from KBC - ‘Ade Raho’, i.e. keeping moving till you reach your goal.

Q) What is your take on RBI Monetary policy meeting?

A) RBI has kept policy rates unchanged this time and the stance continues to remain accommodative, with a clear indication that RBI has space to make rate cuts in the near future.

However, the growth trajectory for the year FY-21 is still expected to remain negative. Hence, the RBI Monetary Policy Committee would continue to keep a close watch for a durable reduction in inflation and use this available space to make rate cuts very judiciously and opportunistically.

This would maximise the benefits to underlying economic activity and support the revival of the economy.
Q) Some new NFOs have been launched recently to tap US markets. Do you think that investing abroad is a must in one’s portfolio? What are the factors which one should watch for before investing in overseas funds?

A) We have always suggested that investors should beware of ‘home biases’ while investing their savings. There could be other countries having better growth prospects and potential for higher risk-adjusted returns. Further, diversifying a portfolio across countries and asset classes can be useful to minimize risk.

If we take the US as an example, it is often said that the Indian equity market reacts in line with how US markets have performed the previous evening. So one might feel the Indian equity market would be highly correlated with the US equity market.

However, this is just a sentimental effect and a loose narrative. If we look at actual data points over a long term history of 10 to 15 years and compare the price returns of the US index S&P 500 in rupee terms with the Nifty 50 index, the correlation is very low in the range of 0.20 - 0.30.

Hence, depending on the investor’s financial goals, risk-return expectations and time horizon, it might be useful to have a small exposure, say 5 to 10%, in international investments.

While investing overseas, investors should be careful about 3 key factors (1) Currency risk, since overseas funds denominated in US dollar could be negatively impacted when the dollar depreciates and some of the returns can get reduced. (2) Country specific event risk, for example, one can expect US markets would be influenced during the next few months by the developments in the presidential elections and final outcome. (3) Short term correlation, especially during crisis situations, where all assets including those having historically low correlation, would tend to move in the same direction thereby reducing the benefit of risk diversification during such periods.

Q) Gold surpassed $2000/ounce just last week. Equity markets are also up by about 50% from the March lows, but will still beat Equity Asset Class hands down in 2020. Do you think investors should tweak their portfolio allocation strategy?

A) In line with the points discussed above for geographic diversification, one should also diversify across asset classes and consider to have 5 to 10% allocation to Gold.

While exposure to other countries like the US would form a part of the portfolio’s growth component, the exposure to Gold would form a part of the portfolio insurance, with the potential to be a good inflation hedge.

Historically, Gold has acted as a diversification to equity allocations, both in Indian as well as global markets.
If during the recent rally your gold allocation in the overall portfolio has increased beyond the expected threshold, then it might be useful to consider booking some gains and realign the portfolio allocation to your desired long term strategy.

Q) What is your target for the yellow metal for the year 2020, and how can investors leverage the share momentum which this asset class is seeing?

A) We might not see a constantly rallying gold going forward from the current $2000 levels. Amidst some volatility and related correction in prices, we are likely to see a gradually up trending gold price over the next twelve to fifteen months.

Gold tends to outperform when we see high inflation and negative real interest rates. If inflation collapses due to the continuing crisis and lockdowns, then real rates might trend upwards which would be bad news for gold prices.

On the fundamental side, there is a potential for supply shortages due to lockdowns and constraints on mining as well as transporting gold, but on the other hand, demand has not declined too much both for industrial end use and for investments. Thus fundamentals are likely to remain strong.

Q) Someone who is already invested or long in the market since March, what would you advise – book profits or hold for more potential gains?

A) Investors should review their overall portfolio allocation and then depending on their holding period and individual risk appetite, take a call whether to book profits or increase equity exposure.

I recall my learnings from Alan Greenspan’s investment philosophy that investors should keep ‘Irrational Exuberance’ in check. When it comes to investing, one mustn’t rely on emotions. The numbers must support and back up the rationale behind the investment.

Q) Which are your re-rating themes in markets and why? Or sectors which could get rerated as economic normalizes?

A) The world is changing rapidly and radically. Most sectors will recover – some sooner and others later. In the past, we have seen changes that were driven by factors beyond our individual control (technology, infrastructure, etc.).

However, this time around we believe the situation is different. The changes are shifting the very behaviour of the consumer itself. Forecasting collective human behaviour is very difficult and likewise predicting market outcome, especially in the midst of a pandemic, is challenging.

Currently, we have bucketed our expectations into three sets of sectors with varying clarity on the future path (1) High Visibility covering personal mobility ie auto, healthcare & hygiene, insurance, affordable housing; (2) Medium Visibility covering packed food or FMCG, facilities management, manufacturing protective gears; and (3) Low Visibility covering sectors like tourism, hotels & restaurants, commercial real estate, luxury housing.

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