For past couple of weeks I have shared many random thoughts and
feedback from my sources, and views of some experts regarding the current state
of affairs in India. As promised, I shall now present my thoughts on investment
strategy for post lock down period.
Key message
1. The current crisis is
unprecedented in the sense that it has seriously impacted the liquidity,
solvency and viability of a large number of businesses, all at the same time.
The number of businesses going out of business before this crisis ends would
therefore be much larger than the crises faced by global economy in past 75
years since the end of WWII.
2. The only way out of
this crisis is to inflate a colossal bubble in asset prices, which is equally
unprecedented.
I believe that the foundation of next big global bull market
will be laid in next 12 months. Like every time before, the next bull market
will be much bigger than the previous one. We shall see a large bubble building
in the market that will change many things in the real economy as well; much
like the internet bubble of 1990s reshaped the global economy forever.
3. The new trade and
strategic blocks will emerge to provide leadership to the world. The world may
de-globalize, localize and re-globalize at the same time. Collective
leaderships and many smaller common markets like EU having deeper cooperation
may emerge. Digital international highways may become more common than the
traditional physical movement of people. The assets and currencies may get further
dematerialized. The international travel protocols may change to include
medical tests as a prerequisite for all international travel.
4. People rather than
material will become the focus of policy formulation. The demographic trends
may dramatic shifts over next 2-3 decades. It could be either through liberal
but orderly immigration or incentives to procreate more in developed nations.
5. The global wealth and
income inequality may increase to alarming levels. The number of poor (below
poverty line) may rise disproportionately across the world, especially in
emerging countries. This could potentially trigger a fresh wave of communism
across the world fueled by increasingly isolated China and Russia.
The next bubble
In my view, the next bubble in the market will be inflated by
the disproportionate rise in investment in the global healthcare sector. The
initial trends in the global markets are already indicating towards this
phenomenon. Once the lock down forced by COVID-19 ends and the governments
declare containment of the virus, the budgets both at state and household level
could rise significantly.
I believe that this bubble could be far bigger and durable than
the dotcom and subprime bubbles, as it deals with human lives directly. The
politicians, bankers, investors, policy makers, administrators, businessmen,
consumers et. al. who have spent weeks locked down in their houses fearing for
their lives while watching the death statistics on media, would readily accept
the need for much higher investment and spending on healthcare. In that sense,
this bubble will be far more tangible, believable, acceptable and inflatable.
In Indian context, more than manufacturing of pharmaceutical,
which may be subject to much higher degree of price & other controls due to
higher government intervention in the sector, I would be positive on healthcare
related services (like diagnostic, CRAMS, hospital& clinics, telemedicine,
health insurance etc.), healthcare equipment & supplies manufacturers (like
testing kits, hospital equipments, low value mass consumption items etc)
manufacturing of key ingredients for large global manufacturers (APIs,
specialty chemicals etc.) and healthcare professional education & training
business.
The Strategy
Assumptions
- Lock down may open before 30 June 2020 and normalcy may return in businesses and logistics by 30 September 2020.
- Interest rates may remain lower fro longer.
- Chemical manufacturing in India may see great impetus as global supply chain looks to shift from China.
- Poverty shall rise and so shall the efforts to alleviate it, bringing greater focus on food production and availability.
- India will be able to become part of some meaningful trade blocks that may emerge post lockdown
Asset allocation
I would maintain my equity overweight stance on asset allocation
and increase equity allocation further to 70% from the current 65% and cutting
the debt allocation from 30% to 25%. For now I will hold 25% (out of 70%)
equity allocation in tactical cash to be deployed over next few months.
Equity investment strategy
I would continue to focus on a mix of large and mid cap stocks,
with decent liquidity, solvency ratios and operating leverage.
(a) I would be overweight
on healthcare services and IT services sectors with 35-40% allocation to these
two sectors.
I would however always be mindful of the possibility that India
may actually just participate in the global trend and not much may be achieved
on the ground in the areas of healthcare services. So buying established
businesses at reasonable valuation would be a key consideration.
(b) I will be underweight
financial services and discretionary consumption.
(c) I shall add agri
inputs and chemicals.
(d) Target 12%-13% price
appreciation from my equity portfolio in next 12 months.
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