After a volatile 2018 and 2019, fear more than hope is occupying people's mind. ‘Where to invest’, has become a difficult question to answer. The reason is obvious. All primary asset classes are facing headwinds, some way or other. Real estate continues to be a drag with little hopes of revival, so it's a seemingly unattractive investment option.
After 135 bps of repo rate reduction, the bank FD rates have also reduced to below 7 percent. Gold saw a sudden run up against all expectations in 2019 but now it is in a price territory where many may not be comfortable to buy. Equity markets have failed to fire for the last 2 years and with a gloomy economic outlook, the equity markets do not give much reason to cheer.
It isn't the first time that we are witnessing a period where every asset class looks unattractive. Every few years, you come across similar situations. Since, except gold, all other asset classes are dependent on the Economic growth, they end up having some degree of correlation.
Most of us base our investment choices on how various asset classes have performed in the recent past. And we end up using that as the primary matrix.
Most of the investments that we make are for a very long duration, probably a lifetime. A significant portion of our savings and investments are directed towards our long-term goals, primarily retirement. And then we may have some medium-term goals like education and marriages of children. Only a small portion of our investments are directed towards short term definitive goals. If this is indeed true, then it is better to look at long term trends while deciding our asset allocation, rather than looking at short term performance.
It is almost impossible to predict short term trends. As innumerable factors together determine how a particular asset class would behave. And generally, most of these factors are difficult to predict. Like how many of us could have predicted the present US-Iran skirmish; or the US-China trade conflict; or the IL&FS fiasco. For instance, no one had a clue in 2018 that in 2019 the GDP growth in India will fall sharply.
It is much easier to look at long term trends as they are based on demographics, policy direction, social structure, politics etc. A long-term investor is also able to take short term volatility much more comfortably as there is a confidence that periods of exuberance may be followed by patches of pain which shall again be followed by periods of exuberance.
When investing for long term, therefore, the quality of investment decisions can make a bigger difference in your return performance than just the timing.
In 2020, focus on how is your “overall asset allocation”.
A proper Asset Allocation would have adequate representation of all the four asset categories. Only the proportions would depend on the financial situation, goals and risk preferences.
Precious metals have lifestyle utility. At the same time, they are an excellent hedge against inflation and uncertainties. In this technologically advance world, even a slight geo-political or economic disturbance makes people rush towards the safe heaven assets i.e. gold and silver. The long-term performance of Gold & silver, is linked to inflation. Basically, very little real rates of return. There could be short term spikes driven by Geo-political disturbances, but there is a strong reversion to mean once the normalcy is restored. As such, precious metals should have the least allocation in any portfolio.
Real Estate is an asset class of choice and most people in their middle age may already have bought a house for themselves or may be planning for one.
In a densely populated country like India, there will always be scarcity of space in cities and the prices therefore shall continue to remain elevated. The real estate market went through a phase of super normal returns form 2000-09 as this period coincided with a very large economic expansion in India. This phase is behind us now. With a $2.7 trillion economy, the growth would only be gradual. Since, the demand for real estate would follow the Economic growth, the price trend at least in bigger cities shall continue to remain weak in the next 5 years. Having said that, real estate has been known to beat inflation in the long term. So depressed prices are good opportunities for a value investor who is looking at long term investing in a property.
Fixed Income is generally the largest proportion in a conservative client’s portfolio. Most people are comfortable parking money in bank FDs and small savings. ‘Lower but surer’ is generally the philosophy for most ordinary people. Many people are complaining about the low interest rates, but most do not know that India currently has among the highest “real rates” in the world. Our expectation for high interest rates has been set because we have had high inflation for decades. With the inflation coming down to below 5 percent, we will have to re-adjust these expectations.
For an evolved investor, fixed income should be a balancing asset class. Whatever savings is left after allocating to Equities, Real estate and Gold should go into fixed income investments. Also, all funds meant for short term goals should also get allocated to fixed income.
The fixed income market in India has gone through a catharsis in 2018 and 2019, owing to the turmoil in debt markets. The dust created by the storm is now gradually settling and hopefully 2020 will be much better for Fixed Income investments.
Equity markets have remained flat for the last 2 years. While the Nifty looks at all-time high, it is primarily driven by 10-12 stocks that continue to defy gravity. The broader markets are flat to negative due to the economic slowdown, credit crisis and slowdown of consumption.
The long-term trends in equity remain very strong due to the inherent demographic strength of India and also a pro-market stance of all political parties. Even the near-term outlook seems good as both the government and RBI have taken a slew of measures to reverse the growth trend. Most of these measures would start showing positive impact in the next 4-6 months.
Since equity markets are driven by expectations, a lot of money shall start moving into stocks once people realise that the growth is back on rails. Equity markets are likely to recover smartly in the next 12 to 18 months. So, people should not lose patience and hold on to their investments.
For a moderate risk investor, looking at long-term investing, equity should constitute a majority of his portfolio, followed by real estate and fixed income.
(The author is Managing Director at Ladderup Wealth Management.)
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