Vijay Kumar Gaba

Continuing from yesterday (see Preparing for chaos - 3)

In April, I had shared my thoughts about the investment strategy for post COVID-19 world (see here). The strategy was based on the assessment of situation based on the information available till then. Though the strategy has worked out very well so far, I must admit that luck might have played some part in this.

The present circumstances indicate that the socio-economic, geopolitical and political repercussions of the COVID-19 pandemic would be much deeper and wider; and would be felt over a much longer period than earlier anicipated.

I continue to believe that

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 see 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.

I further believe that the present view of European and Japanese resurrection may not come true in true sense, as adverse demography will keep hindering their ambitions.

In Indian context, I believe that we may just follow the global trends and not create a trend of our own. I do not see any significant acceleration in growth trajectory normalized for poor base effect of FY21. Indian economy may struggle to avoid getting trapped in whirlpool of stagflation and may just avoid that. The interest rate may not fall as much as anticipated earlier, but may still remain low. Consumption may sustain, as the agriculture sector that employs maximum workers in the country, may continue to do better, especially in terms of investment and fiscal spending.

As an investor therefore I shall avoid committing strongly to any specific sector or asset class for next couple of years. I will continue with my "Buy and Hold with regular rebalancing" strategy for selected stocks.

Asset allocation

I shall be reducing my equity allocation to neutral (60%) from overweight (70%) in next one month. I may also consider bringing it further down to underweight (50%) in 3QFY21. Accordingly debt (30%) and cash allocations (10%) shall also be brought to neutral position.