Vijay Kumar Gaba

 Assessing portfolio for war readiness

Yesterday, I hinted that I shall be staying mostly in defensive mode (bunkers) till the sirens of crisis and uncertainty are blowing over the global economy and markets. I may reiterate that this crisis will create once in life lifetime opportunities for investors; but these opportunities are for the adventurists with strong risk appetite to avail. I would rather identify the opportunity; and happily miss the first 100-200% of gains out of the potential 1000-2000%.

Last week I mentioned (see here) “the investment environment continues to be very uncertain and complex. The geopolitical uncertainties, fiscal policy fatigue and monetary policy dilemma makes short term forecasts very complex. These factors further support the idea of keeping the investment strategy simple and giving preference to capital preservation over higher returns.”

In order to orient my tiny investment portfolio to capital preservation mode, For example, the following are some of the points I shall consider in reassessing my portfolio:

1.    Is the company facing significant cost pressures, especially from rising interest and labor costs?

I would accord low preference to the companies with low pricing power, high debt and rising employee cost to total cost ratio for now.

2.    Is the company facing an uncertain demand environment?

Export demand for consumer discretionary goods, especially in Europe, may face demand challenges for longer than previously estimated. Also, the companies reliant on government orders (especially non critical, e.g., defence), may face challenges. I would avoid infra builders catering primarily to public infra and utilities; and businesses relying on government grants, subsidies and tax incentives.

3.    Between the companies owning material real assets and the companies following an asset light model, I would prefer asset owners for now.

4.    Prefer services over manufacturing. Within manufacturing, I prefer manufacturers of smaller value components rather than large value OEMs.

5.    Prefer drivers of sustenance like FMCG, non-luxury textile, two wheelers, small cars, utilities, pharma, MFIs, etc. rather than agents of growth like large infra developers.

6.    Avoid all “expensive” stocks and loss making new age companies, regardless of their promised growth potential.

7.    Prefer short term debt for next 6 months at least, mostly gilt and overnight funds.

8.    Consider parking some money in gold for the next 6-9months. If the prices fall to my comfort zone.

9.    Hold enough liquidity to ensure that I need not sell anything in urgency for the next 12months. Also increase the liquidity quotient of my equity and debt portfolio.

10.  Watch the development in Europe, US and China carefully.