Year 2020 has been a very eventful year so far (see
here). In past six months many events have taken place which will have long
term repercussions. In that sense these six months could be compared to the
period between May 1990 and December 1990 (see
here). While long term implications of these events will unfold over many
year to follow; in the immediate term we have seen the global economy slipping
into one of the worst recessions since the great depression of 1930s (see
here). The corporate earnings have been greatly impacted in 4QFY20 and
1QFY21 by the COVID-19 induced lockdown; and the visibility of next few
quarters is also clouded. The earnings estimates for FY21 and FY22 have been
significantly moderated accordingly.
The performance of stock markets however appears materially
diverging from the economic and corporate performance. A sharp outperformance
of midcap stocks, especially those with relatively poor earnings stability and
outlook has raised concerns about bubble like conditions in the stock market (see
here). On the other hand it has also made many investors who choose to
change their asset allocation in favor of cash and high quality debt, anxious
about sharp underperformance of their portfolios. I had also tried to address
this dilemma of investors' (see
here) besides outlining my strategy in the present circumstances (see
here).
After completing the midyear review of the markets, economy,
corporate performance, my portfolio performance, and extant investment
strategy, I am quite satisfied with my investment strategy and no need to make
any changes. I may share the main features of my current investment strategy as
follows:
Assumptions
- Lock down restriction may be fully lifted before 30 September 2020 and normalcy may return in businesses and logistics by 31 December 2020.
- Interest rates may remain lower for 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 lockdownAsset allocation
Equity investment strategyContinue to focus on a mix of large and mid cap stocks, with decent liquidity, solvency ratios and operating leverage.
(a) Overweight on healthcare
services and IT services sectors with 35-40% allocation to these two sectors.
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) Underweight
financial services and discretionary consumption.
(c) Add agri inputs
and chemicals.
(d) Target 12%-13%
price appreciation from my equity portfolio in next 12 months.
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