Markets have been at their volatile best in recent times. Obviously, this makes any investor nervous about the safety of capital, leave alone returns. While the Large cap dominated Nifty Index has delivered nearly double digit positive returns over the last one year, the NSE Midcap 150 Index has remained flat, while the NSE Smallcap 250 Index has delivered negative mid-single digit returns. Thus, the market has been bipolar, with Large cap segment doing well, while the small and midcap segments continue to bleed. This has made the equity markets even more difficult to navigate for an investor.
Current Market View:
According to us, the reduction in corporation tax has immediately resulted in an increase in fair value of companies. While previous concerns such as domestic as well as global economic slowdown continue to remain; valuations have become attractive due to the improvement in the underlying fair value. The corporation tax cut could result in the improvement in economy’s investment demand and bring back the animal spirits. Thus, the long term prospects for investing in Indian market have improved.
However, the near term outlook remains challenging. Global economy is experiencing a sharp slowdown, and India is no different. In India, we are witnessing a massive slowdown in consumption with sales of cars, jewellery, home improvement products, etc. taking a plunge. According to us, the current weak trends are cyclical and may persist for another twelve-eighteen months, before showing some improvement. Having said that, we remain optimistic about the longer term growth trajectory, which continues to be driven by structural factors. According to our internal research, market trades at a discount to its current fair value, which makes the valuation attractive.
Global macro factors:
Easing of monetary policy by global central banks is one of the biggest positives for demand for risky assets like Indian equities and bonds. Also, while the slowing economic growth in the developed countries is negative for India’s economy because it impacts demand in exports sector, contribution of exports is much lower compared to domestic consumption and investment. So, net-net, India’s fortunes could be more governed by its domestic economy and monetary policy rather than the global ones. The corporation tax cut can lead to some of the global companies shifting base to India to diversify their manufacturing base away from China, due to ongoing US-China trade war.
Ideal asset allocation strategy:
Investors should not remain over/under invested in any one asset class. They should at least diversify across fixed income and equity. However, they should remember one golden rule: Invest in Fixed Income for safety and in Equity for growth. They shall achieve sub-optimal outcomes if they try to reverse the roles of either of the asset classes.
Generally, investors should invest more in equity when valuations are attractive and vice-versa. We utilize this principle in dynamic asset allocation products. Thus, following the above principle, investors can enjoy best of both worlds, i.e., reasonable returns with moderate risk.
Advice to Investors:
Retail investors have one of the biggest edges, which even some professional investors do not have – their patience and long-term investment time horizon. Investors should utilize this competitive advantage by investing into markets when economic growth is weak, but valuations are attractive and vice-versa. They would be able to outsmart most professionals by simply utilizing this advantage. Buying and holding on to equity investments requires emotional intelligence and not above average intelligence quotient.
Indian retail investors have been very smart and that clearly shows up in the mutual fund flow trends. Investors have continued to invest in equity despite their account statements not showing a profit on their recent investments. We would recommend them to continue to be disciplined and follow their financial plan and not abandon it due to market volatility. That will ultimately make them realize the benefit of investing in equity as an asset class.
We encourage investors to treat their investment in equity like their home (real estate) which they do not intend to sell. This shall enable them to realize maximum potential from this asset class.
