2020 will be marked as a unique year that has demonstrated the capital market’s pessimism as well as optimism. A lot of this is attributed to the interconnected world we live in. Information now passes on faster than light!
You may look at any domestic or international publication, journalists seem to be massively confused about the state of the economy. At one level, you see reports of the worst indicators ever and in a few weeks, you read Indian economy on a V-shaped recovery.
A lot of non-professional people assume that finance professionals know more than what others know. Interestingly, we, the finance professional, also have the same biases as others.
Truth be told, if someone can apply common sense, they will land up making reasonable investment decisions. I like the word reasonable because I feel that’s good enough. It relieves you from the pressure of being aggressive and try to prove a point. Additionally, it helps you get a good night sleep!
How do you apply your common sense? Go to a coffee shop (wear a mask!) and chat with the coffee shop owner. I am pointing out coffee shop owner because an employee of a franchise may not be well versed on the business side of things. Ask the owner, what time do you get customers, or do you get any? Do this exercise across 2-3 different places because you don’t want to be driven by any personal biases of the owner.
Another exercise you can do is to go to a big grocery store. There are different sections of a grocery store including dairy, chocolates, oil, pulses, and other packaged stuff. Spend time on categories that require some bit of branding. For example, pulses may not but the oil may. Chat with the store manager to get a sense of which all products move the most. Remember from your last shopping list what you are not able to find now and so on. (I get a lot of my investment ideas from grocery stores that have helped me payoff for the grocery requirement for a long time :) )
Coffee shop chat will help you understand where the economy is heading, and grocery shopping will help you with the investment ideas.
My view is that we are in a normal state with a majority of the economy going back to the pre-pandemic levels.
How has the stock market behaved? My view is more than normal.
What does it mean? The market is more optimistic than what it should be. This is primarily due to $28 trillion money flowing in the global markets and a portion of that money coming to emerging markets including India. The rise of the market is not linked to the fundamentals but rather to the cheap money flow.
It’s a tricky situation, do you want to sit out and see the market sour or do you jump in.
This is a time to go back to your long-term asset allocation. I do not have a ready answer on this topic because the asset allocation decision varies from person to person. This is also a time to get rid of any laggards whether in a fund structure or specific stocks. Simply speaking, it's clean up time and you should make a portfolio that you would like to retain for the next ten or twenty years.
Let’s look at the debt and equity asset level, what is happening and what may happen.
Equity
Most of the market especially large companies have gone up quite a lot, more than what the fundamentals indicate. Holding franchise businesses is the key and often large-cap funds or ETFs may not be able to achieve that state. Read this article to identify quality companies.
There are a lot of opportunities in mid and small-cap categories. Keep searching for high quality and high growth companies in this category too.
Avoid pharma and Tech stocks/funds since these two sectors have risen the maximum over the last few months.
Due to immense liquidity, I expect the entire equity space to swell and go beyond the fundamentals even further. Apply caution!
Debt
Given the inflation on a rise, yields will hold up for now. RBI still has room to reduce interest rates provided the inflation numbers stabilize.
Holding a combination of RBI bonds, Tax-Free bonds, Bharat Bond ETF, along with a high-quality short-term debt fund is recommended.
Usually, I have a piece of generic advice for most of the investors. However, given the situation, I do not have a piece of generic advice other than saying ‘apply caution’.
You don’t want to be in a situation where you say, “my wife ran away with my best friend, and I still miss him”. Wife being the returns and best friend is the capital :)
Disclaimers
Investment in securities market are subject to market risks. Read all the related documents carefully before investing.
The securities quoted are for illustration only and are not recommendatory.
Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.
Details of the advisor
Advisor: Ankur Kapur
SEBI RIA No.: INA100001406
BASL Member ID: BASL1337