History has taught us that in times like these it is very critical for long-term investors to maintain their asset allocation discipline.
Since the last week of February, the coronavirus outbreak has sent shivers down the spine of equity markets across the globe. Although the virus was first reported from Wuhan, China, on December 31, 2019, it took a toll on markets when it spread across Asia, the Middle-East, Europe and the Western world. Markets continued to panic as the situation worsened with each passing day.
Although the situation is evolving, governments and financial regulators worldwide sprung into action to provide economic support by providing liquidity and stimulus.
Asset allocation discipline is the key
History has taught us that in times like these it is very critical for long-term investors to maintain their asset allocation discipline. In fact, there could be opportunities to re-balance the asset allocations.
In many portfolios, the allocation weight of equity as an asset class would have reduced by default due to a ~25 per cent sell-off across the equity indices and thereby calling for a time to re-balance by shifting the assets from overweight debt/real estate to underweighted equities during such scenarios.
Domestic economy
In today’s era of globalization, China has been at the forefront by virtually becoming the “Factory of the World”. Clearly, most of the supply chains will have their roots or at least some connections with the Chinese manufacturing industry. Therefore, it is very natural that there are going to be supply disruptions and possibly some demand shocks too within China and this will affect the economies of other countries as well.
But the key (multi-million dollar) question is, how long will it take the world to get to normalcy? Clearly, from the initial reports, many parts in China are now getting back to higher activity (85 per cent of Starbucks stores are open, road traffic congestion in Shanghai is higher, activities at ports have begun).
Interestingly, in the last couple of months, we are seeing selective positive feelers from the domestic economy. The monsoons have been quite good & wide-spread, which has increased the groundwater levels & reservoir water levels, helping the sowing for Rabi crop.
Higher agriculture yields and also better price realisations for agriculture commodities should increase the incomes in the rural economy, in turn reviving the aggregate demand growth for the domestic economy. This is also demonstrated by Q3 GDP data wherein agriculture grew by 3.5 per cent in real terms and 13.7 per cent in nominal terms.
Secondly, RBI has been reducing interest rates and also pushing liquidity into the system. Outstanding balances parked by banks under the Liquidity Adjustment Facility stand at Rs3,37,204 crore. In the recent RBI credit policy, there is a clear push to the targeted sectors like Auto, MSME & Real estate (selectively). These measures should definitely get growth back in the economy.
The Purchasing Managers’ Index (PMI) has indicated better activity in the last couple of months both for the manufacturing and services sectors. The GST collections for the four consecutive months too have now crossed Rs 1 lakh crore, clearly showing higher activity at the ground level.
Not to forget the fall in crude oil prices from $65/ barrel to $25/ barrel, which helps in improving margins for a number companies and also helps the government to maintain the deficit target to some extent.
Clearly at this point in time world is grappling with an unprecedented event, at the same time asset prices (many equity stock valuations) have also become quite cheap, therefore investors who are ready to sit through such challenging times and believe that sunny days will be back, will in all probability make decent returns in equities.
Sachin Shah
Fund Manager, Emkay Investment Managers Ltd.
Sachin is a seasoned fund manager with over two decades of experience in the Indian equity markets. By virtue of his extensive research, Sachin realised early-on the need for a framework in which companies with evasively tricky standing needed to be filtered out very objectively, leading to the development of E-Qual Risk, EIML’s proprietary module which helps us to evaluate and compare listed companies on various aspects of governance. Sachin shares his knowledge and insights through various media interactions across print and digital platforms.
