In the past 6 months, with the onset of three major events i.e. Brexit, Trump, and Demonetisation, we have seen an initial impact on the Indian economy and ultimately on our financial investments. While ATM machines are getting recalibrated in India due to one of those events popularly called “Demonetisation”, we should now also check if there is a need for recalibration of our investment portfolio.
This kind of major events calls for the re-calibration of the investment portfolio (i.e. asset reallocation, sector/investment instrument re-allocation, etc). Based on your Risk Profile, which you can also identify on our website (www.5nance.com) through our “Risk Profiler”, we advise predefined asset allocation to investors. We will see today, why and how best you can re-calibrate your investment portfolio.
Today we are in the economic uncertainty zone with these three events in the process along with the possible fed rate hike event in the near term horizon.
Brexit and Trump Strategy Impact – It is mostly factored in the market valuations with possible major impact on export-oriented sectors such as IT, Pharma. We have seen the considerable correction in these two sectors. Some large IT companies are more focussed on U.S. and European markets and such companies may get affected more due to these two factors where we understand that there would likely impact of the change in strategy by new U.S. government. Even after considering this we see a marginal impact on IT and Pharma sector as these two have already corrected largely post U.S. elections. Considering lower valuations in IT and Pharma stocks these two sectors can perform well over the long-term horizon of 2 – 3 years. We still like domestic focused mid-sized IT companies more compared to large IT companies.
Demonetisation Impact - In the short term, it may have the marginal negative impact on spending, which may get reflected in GDP numbers of the next quarter. In the mid to long term, this move is likely to have a positive impact on the Indian economy.
Real Estate - Old residential property prices are expected to correct, which will also impact new housing in the short term (6 – 8 months).
Real Estate developers have enjoyed high margins in the past. There will be short-term loss of higher margins coming down due to correction in large size housing projects. Going forward, we expect higher volumes of Home buyers with Real Estate developers focussing more on low-cost housing will compensate for this short term loss.
Banks and Job Creation - Indian Banks are currently struggling with NPAs of over Rs 6 lakh Cr. Banks will get well-capitalized and become stronger to support GDP growth in the longer term. The banking sector will witness a positive impact of this currency revolution in the mid to long term.
Infrastructure - Banks will get huge deposits with this exercise and will be well capitalized with money to support the government's strong infrastructural development plans in next few years. This will drive business of infrastructure sector based companies.
Electronics, Metal, Cement Sector - Strong, healthy and more transparent Real Estate sector will attract investments and will create more demand for construction raw materials and electronics products.
E-Commerce & Telecom – Government and Corporate will focus will be more on the digital money, online transactions, the internet and mobile transactions, thus encouraging physical cashless currency environment, providing a favourable platform for e-commerce sector to flourish seamlessly.
Distribution & Logistics - A more supportive environment for e-commerce sector will give a boost to new age faster and efficient distribution system and generate higher revenues for innovative distribution and logistics companies.
FMCG & NBFCs – Cash focused transaction companies such as FMCG sector and some NBFC companies are likely to see immediate and short-term negative impact of demonetization.
Impact on Debt Market - Inflation is likely to come down due to Cash crunch, correction in Real Estate sector and also spending slowdown. The Indian currency is likely to see some negative impact due to FIIs money outflows. But Indian banking system is still likely to have high liquidity due to current deposit drive, which will support the downward movement of interest rates.
Ideal Asset Allocation
We have seen three events starting their journey and those three will keep on impacting markets. Additionally, one more major event of U.S. Fed rate hike is around the corner and possibly we may see the first hike on the 15th December. This investment scenario has pushed equity market in the uncertainty zone and one should be ready for more volatility for the next 2 – 3 months. These events can create big opportunities for the investors to invest at the lower valuation levels. From such lower levels we may expect better returns over the mid to long term.
Equity oriented Portfolios - In case of Aggressive Dynamic Portfolio Investors, we suggest to invest 80% into equities/equity funds and rest of the money could be held in cash equivalent liquid funds. They can consider deploying this cash part in a phased manner on major equity market corrections or while equity market settles down after absorbing the final shocks of these big events.
Debt Oriented Portfolios - Bond yields are likely to soften driving bond prices upward but at the same time recent spike in U.S. bond yields may keep the check on yield movement in the mid to long term. Within debt asset class, investors can have the allocation divided into Short Term Debt Funds and some allocation to Dynamic Bond Funds as we are of the opinion that rates are likely to see some fall going forward with high cash surplus with banks.
In the case of Conservative Dynamic Portfolio Investors, we suggest to invest 70 - 80% into debt/debt funds across Short Term Debt Funds, Dynamic Bond Funds with Mid Term maturity and rest of the money could be held into cash equivalent liquid and ultra-short term funds. They may consider deploying this cash part held into liquid funds in a phased manner on major equity market corrections or while equity market settles down after absorbing the final shocks of these events.
We strongly advise aligning your investment portfolio with our Ideal Portfolios. You can refer your Risk Profile based Ideal Portfolios relative to different investment horizons on www.5nance.com and get exact allocation for Equity, Debt, Large, Mid, Small Cap and Debt Funds. While Banks recalibrate the ATMs, Let’s re-calibrate our Investment Portfolio to build the best possible efficient Portfolio.