How to safeguard investments amidst geo-political uncertainties

Aashish  SomaiyaaMotilal Oswal AMCEscalation of tensions in Indo-Pak relations has brought investment concerns amidst geographic uncertainties to the center stage.Any investment in capital market instruments is susceptible to be impacted by innumerable factors. As an investor it is not always possible to understand all factors and correctly estimate their impact on one’s investments. Just like the famous Eisenhower matrix enables time management through an urgent vs important matrix; in the investing world one must follow an important vs knowable matrix. Accordingly there are some factors which are important and they do impact our investments but either their occurrence or their impact is unknowable. Similarly, there are factors that are knowable but are unimportant and hence having limited or no impact on our investments. While investing, it’s key to focus on important and knowable factors.Coming to the current context - there is an escalation of tensions in Indo-Pak relations. If there is a war, it will be an important factor with consequences for investments. But will there be further escalation in the current situation? Now that’s an unknowable. Focusing on the unknowable and worse still taking portfolio actions based on unknowables falls in the realm of speculation and would eventually lead to derailment from long term financial goals. Since there is no way to know exactly about such events, there is no way to assign probabilities of occurrence and consequently shield portfolios.There is no better defense than to have a portfolio of companies whose earnings are resilient to as many macro parameters as possible. While I have no reason to believe this is going to happen but just for instance, a full blown war situation could result in fiscal slippages, capital outflows, turbulence in exchange rates and eventual impact on inflation and interest rates. Invest in businesses whose focus of control is as close to the business as possible and not somewhere dependent on the very same macros that come under threat. No business is totally disjointed from the macros, but it is also equally true that some businesses are less impacted by these macros and some businesses more so. The kinds of businesses that are relatively secular in growth and resilient in the face of macro adversities are likely to suffer less in a market downdraft and most likely to bounce forward when normalcy is restored to markets. In such time, there is a lot of discussion on defensive strategies, but the best defense in uncertain times is to ensure that portfolios are grounded in individual corporate fundamentals.The other important learning to bear in mind is to ensure asset allocation discipline. Such geo-political turbulences by nature do not come with sufficient warnings and it is best not to get caught exposed to any one type of investment. It is important to have a mix of assets and instruments in line with investment goals, risk tolerance and return expectations. Just like one is prescribed to stay hydrated especially in times of ill health, it is equally important to maintain liquidity to tide over few months of cash flow requirements and at the same time to take benefit of any lucrative opportunities that may get thrown up amidst turbulence. Lastly, do not react after the event has occurred. What has happened up until now has limited bearing on what may happen from here on. Lets not get stuck on prices and values, every day in the markets is a new day and all prices and values have to be understood to reflect today’s reality. Most critical is to focus on the medium to long term future and avoid being influenced by the near term past.