Since I reviewed
my investment strategy three months ago (see
here), few things have changed in the economy and market place; the most
noteworthy being the following:
(i) The
economic slowdown has become more pronounced. Both consumption and investment
demand have slowed to multiyear low levels. The government has admitted that
this slowdown is unique in nature, since it is for the first time in India that
a economic slowdown has been triggered by poor demand growth rather than the
usual supply side constraints. Many corporates, especially consumer facing
businesses like FMCG and Automobile have echoed similar views. However, the
recognition of the unique character of the slowdown within the government has
been quite delayed. This has resulted in some misdirected policy actions.
(ii) The
government has started the process of restructuring of tax laws, beginning with
the announcement of new structure of the corporate tax rates. This has sent a
strong message to the business and investor communities about the intent of the
government. However, this piecemeal restructuring may not have the desired
impact unless followed up by the remaining part, i.e., restructuring of personal
income tax. This change may not have any material impact on economy and markets
in the near term.
(iii) RBI
policy has turned decisively accommodative with focus on ensuring transmission.
However, most banks and NBFCs are still grappling with asset quality issues.
Besides, the beginning of the process of PSBs consolidation might also slow
down the policy transmission to some extent.
(iv) A
large oil facility in Saudi Arab has been attacked. The attack was initially
likened to the 9/11 attack on the New York twin towers. However, even two weeks
after no retaliation of any kind is visible. It is difficult to fathom that the
attack of this magnitude and audacity will go without an adequate response.
However, since the global leadership is presently preoccupied with their own
respective issues (For exsample, UK-Brexit; US-Impeachment, Trade War;
China-Slowdown, Trade War) the action may be delayed. This may though remain a
overhang in the global financial and energy markets.
(v) The
overall corporate earnings may remain poor in 2QFY20 despite tax concessions.
(vi) The
global economy is undergoing a slowdown that could be prolonged and more
deflationary. The yields may therefore stay lower for longer.
In view of this, my outlook and
investment strategy would be as follows:
Outlook
(1) Macroeconomic
environment -Stable
(2) Global
markets and flows -Volatile
(3) Technical
positioning -Marginally negative
(4) Corporate
earnings and valuations - Marginally negative
(5) Return
profile and prospects for alternative assets like gold, real estate, fixed
income tec. -Neutral
(6) Greed
and fear equilibrium -Neutral
(7) Perception
about the political establishment -Positive
Overall market outlook -Neutral to
Marginally negative
Investment strategy
1. Presently, I am fully
invested in all asset allocations. If the equity markets rise from here I would
be raising 10% tactical cash.
2. Three fourth of my debt
allocation is in medium duration gilt. One fourth is in select credit funds.
3. My present equity
portfolio mostly comprises of quality mid cap stocks and a few large cap
stocks. I shall maintain this mix.
4. I shall increase my
overweight on specialty chemical, real estate, and construction. In healthcare,
I have pure API manufacturers and CRAM players. I am inclined to add some auto
ancillaries and CV manufacturers. I shall continue to avoid industrial
commodity producers.
5. I shall continue to
trade actively with of one fifth of my equity allocation.
6. I am mindful of the
possibility of a significant global market correction and consequent major
correction in Indian equities. I would continue to hedge against this
possibility through quality of stocks in portfolio rather than buying a put.
I have assumed a relatively stable INR (Average around INR70/USD
for 2019), weaker crude prices (Brent crude average below US$62/bbl) and lower
rates in investment decisions. Any change in these assumptions may lead to
change in outlook and strategy.
What will change my view?
- Full blown recession in US.
- Total tech melt down in US markets.
- Hard landing in China, forced by escalation in trade war.
- INR breaking and sustaining over 74/USD.
- A full blown war in the Persian Gulf.
- A disorderly Brexit
I shall not be bothered at all about
the following:
- Indo-Pak rhetoric
- 2QFY20 GDP growth number falling below 5%.
- A few more struggling corporates and NBFCs defaulting on their debt payment obligations.
- Trump impeachment
- Rise in fiscal deficit in India
- Results of state assembly elections
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