COVID-19 has shaken up mankind in many ways, while on one hand there is actual loss of life, on the other is fear and avoidance, which will extract a huge economic toll. The obvious impact is on travel and tourism, entertainment, F&B, shopping malls, etc., the secondary impact would be on jobs and incomes.
The vicious circle of job loss and demand destruction would keep multiplying till a cure is found. And the more time it takes for a cure to be found, the more significant the economic impact. Many firms, big and small, are likely to fold up and supply chains are likely to be disrupted.
IMF has projected significant declines across the world for CY20 and logically financial markets should react to this kind of negative growth in a negative way. However, the last few declines have taught us that central banks and governments across the world will respond with huge stimulus and lower interest rates and reduce the damage during the downcycle.
Market players will increasingly see through this worst phase and position themselves on the recovery upswing. While it is still a long way to go before COVID-19 ends, the $11 trillion of unprecedented stimulus offered globally should act as a balm and prevent the worst.
India with 137 billion people is at the highest risk in terms of sheer numbers likely to be infected and the economic fallout could be huge as well.
We also have the border dispute with neighboring countries, migrant labor issues, vagaries of monsoon, cyclones, other natural disasters in the form of locusts, etc., which make the current investment climate more uncertain.
Any uncertainty is a great time to make fresh investments or re-allocate existing investments. Fear creates opportunities in the volatile asset classes and savvy investors would make the most of such opportunities.
However, it is not possible for everyone to be smart and get it right. The next best thing is to be a disciplined investor, one who would know his/her long term investment objective and the level of risk tolerance and is well-diversified not just across asset classes but individual securities.
Having an investment plan and reviewing and reallocating the investments periodically and more so during a crisis like the current one is the hallmark of a successful investor. Having an investment advisor on his/her side to help with the investment portfolio would be an added advantage.
Traditional asset allocation would look at gold, fixed income, real estate, equities, private equity, etc. With more sophistication in the financial markets, structured products, currency, commodity, etc are finding their way into investors’ portfolios. While the focus should be on return maximization, risk minimization has to be a part of the plan and works very well, as we have recently seen in the context of Indian fixed income markets. Investors should also explore tactical or active asset allocation based on market outlook to help generate better returns.
With interest rates low and with alternative assets yielding very low risk-adjusted returns, gold and equities seem to be interesting in the current environment with the potential to deliver good returns over the medium to long term. The challenge in equities is to get the timing right and here again a disciplined investor would score by spreading out his investments over the next few months in a disciplined manner buying on major dips. Our preference would be
- Overseas large-cap and technology companies, best bought through funds available in India
- Large and mid-cap Indian leaders with a strong Balance sheet and operating efficiencies
- A small percentage of assets allocated to small and mid-cap companies available at great valuations
Most likely 2 years from now COVID-19 would have been dealt with, the economic damage would have been done and mankind would be looking forward with new hope. As the emotional scars from COVID-19 would start to fade, financial markets would be discounting a new future. It is always good to be an optimist and stay invested.
The short to medium term could be rough, however, when the tide turns, it could be sudden and it may be a big move. The most beaten-down companies which survive this worst phase could perhaps give the best returns.
