Since I shared my investment strategy for 2020 and beyond on
24th December 2019 (see here), few
critical developments have occurred which warranted a review of the strategy.
The following three of these factors are important from investment strategy
view point.
1. Outbreak of coronavirus
in China is threatening to become a global pandemic causing massive disruption
in global trade and commerce. The virus has spread to many Asian and European
countries. From the assessment of various agencies like IMF, WHO and ADB etc.,
I assume that the outbreak may materially impact the global economy.
Consequently, the deflationary pressure in the global markets
has increased leading to higher demand for safe haven assets like USD, US
Treasuries, Gold etc.
Most global central bankers had already begun to moderate their
policy stance in 2019 itself. This event may prompt them to further enhance the
monetary stimulus.
2. The RBI has implemented
a paradigm shift in its policy regime. After experimenting with the monetary
policy for few years, it has now reverted to management of comprehensive credit
policy with supporting growth as the primary objective.
The latest policy tools brought into use by RBI (Long Term Repo
Operation or LTRO) and postponement of Gilt maturities through operation twist
have added significant monetary stimulus to the financial system. LTRO has
virtually pegged the short term cost of funds for banks to the repo rate of
5.15%. Operation twist has on one hand reduced the amount of gross borrowing by
the government through postponement of maturities, on the other hand it has
eased the long term borrowing cost for corporates by keeping benchmark yields
under check. For a change the transmission of policy is accelerated and
effective.
3. Pricing power seems to
be returning with the producers. Sectors like cement, telecom, FMCG etc have
shown encouraging trend of price hikes even in the slow demand periods. The
3QFY20 corporate results therefore had fewer disappointments, though macro
economic data continued to remain poor.
In my view, under these circumstances, it is highly likely that
we may see our financial markets tracking the trends seen in US, Japan and Some
European markets during 2010-2017. Persistent downward pressure on yields shall
keep both the bonds and equities buoyed. At some point in time the real estate
shall also attract buoyancy, given poor yields and abundant liquidity.
I am therefore inclined to change my investment strategy and
goals as follows:
A. Upgrade both
equities (to OW) and debt (to EW) from UW earlier.
B. Sell gold and
add real estate (REITs, Realty Company equities)
C. Increase overweight on AMC and Insurance sectors.
I am assuming further weakness in USDINR to an average of
72.50-72.75 this year. I shall effect these changes over next 5 weeks.
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