While the economy may struggle with less than 2 percent growth, such opportunities offer a window to invest when valuations are relatively attractive.
Any crisis, whether due to economic reasons or due to natural calamities, brings about uncertainty. This triggers off a series of consequences beginning with “flight to safety”.
In bonds, monies will shift from A/AA to AAA-rated bonds and from AAA to government securities and bank fixed deposits and for foreign institutional investors, from Indian bonds back to US bonds.
Similarly, in equity, monies will shift from small and midcap to largecap stocks or even to cash and liquid and for FIIs, from Indian stocks back to the US stocks or government securities.
This shift leads to fluctuation in prices (sometimes severe as in current case) and hence an increase in volatility.
The volatility index (VIX) on Nifty50, which was in the 11-17 range in Jan’20 jumped up to touch an all-time high of 83.6, and is currently at around 38.5 (still quite high).
And, this volatility gives rise to opportunities as valuations also correct and come down to reasonable levels.
The Nifty 50 dropped by 38 percent to 7,610 (mid-Mar’20) from its peak of 12,300 (mid-Jan’20). The index then jumped 22 percent after the fall.
Today, the largecap stocks are still available at an average of 26 percent lower price than their peak prices in mid-Jan 2020.
As valuations correct, the opportunity arises. This is the time to be cautiously optimistic and tactically start allocating 15-25 percent of your fresh equity allocation into largecap stocks and funds.
This is also the time to analyse and exit from investments that are unlikely to capture the next up-cycle. Market cap, GDP, P/B, and dividend yield are hovering around the long-term averages making investments attractive at this level.
And, as the current situation is un-predictable, equity markets could provide opportunities to deploy the balance 75-85 percent over the next three-six months at lower levels.
While the economy may struggle with less than 2 percent growth, such opportunities could give investors a window to invest when valuations are relatively attractive.
And, as in stock markets most gains are made by investing at the right price–this is the time to be cautiously optimistic through “flight to value”.
However, on the fixed income side, this is the time to be cautiously pessimistic. Prospects of credit downgrades have increased as highly leveraged companies may struggle to honour debt commitments in the next six to 12 months.
Credit-risk funds that were providing a 100-150 bps alpha on fixed income returns turned marginal/negative as liquidity vanished in the underlying illiquid bonds.
This is the time to stay parked in good credit quality (AAA/G-Sec) short maturity funds. And, as in fixed income markets, protecting the principal is important – this is the time to be cautiously pessimistic through “flight to quality”.
(The author is Head of Investments, BNP Paribas Wealth Management.)
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