The strategy should be to keep an eye on relative valuations. Currently, we are oriented in favor of large-caps in our model portfolios.
The strategy should be to keep an eye on relative valuations. Currently, we are oriented in favour of large-caps in our model portfolios, Sandeep Jethwani, Senior Managing Partner and Head of Advisory, IIFL Wealth, said in an interview with Moneycontrol’s Kshitij Anand.
Q) IMF suggests that we could see Great Depression 2.0. What kind of impact would that have on markets and the economy?
A) The important things to watch out for are the known unknowns – how long does this lockdown, or semi-lockdown continue globally, and what the second and third-order effects are, and what are the changes in consumer and business behaviour in the post-COVID-era.
The first-order effects in terms of shrinkage of economic activity are clear. We should also not forget that in times like these call for major fiscal and monetary policy interventions which end up playing a major role in the path forward.
From a marketer’s standpoint, while each time is different, it is useful to look back at the previous recessions or the bear markets.
Such periods bring with themselves larger market volatility with many intermediate dips and up moves. Investors should be prepared for larger market moves, both ways in times like these.
Q) March quarter earnings are likely to stay muted but management commentary will be eyed. What are your expectations from India Inc.?
A) Early commentary from India Inc. has been cautious. Companies are trying to ready themselves for multiple scenarios. Businesses fully recognize the seriousness of the near and medium-term impact of this, and to that end will try to reposition their strategy too.
On the capital side, we see companies trying to shore up liquidity to be able to react to different situations. Given that it is more likely to be a once in a lifetime scenario playing out, most business leaders will orient themselves to a cautious stance.
Q) So if we are in a Great Depression-like situation, and what is the kind of portfolio that one should work with?
A) From our end, there are three things that we are focused on. One, to get the asset allocation right. Here, our focus always has been to understand the investor’s downside tolerance and then guide on what is the right allocation to equity in the portfolio.
Two, work within the asset allocation limits (booking profit at higher levels, reinvesting into equity at lower levels) while keeping an eye on valuations.
And, three, focus on high quality plays both on the equity and debt side.
Therefore, the call to stay underweight or otherwise will be guided by the client’s own asset allocation. All this, while carefully evaluating high-quality investment options and deploying gradually.
Q) With the economy heading towards near-zero levels, do you think it would make sense to avoid small & midcaps?
A) The strategy should be to keep an eye on relative valuations. Currently, we are oriented in favor of large-caps in our model portfolios.
While stock-specific decisions are best left to fund managers, we feel most fund managers will focus on companies that have balance sheets and market share that can help them ride over this storm – whether they are large, mid or small caps.
Q) Your two mantras for investors which could help them get through the COVID-19 storm?
A) One, keep sight of your life goals and create/align portfolios accordingly. This is very important to ensure that one doesn’t get stressed out in times of extreme volatility. For near term needs, create portfolios with minimal risk. For long term monies, keep equity allocations in a proportion that allows you to tolerate volatility.
Two, avoid the tendency to react too frequently. Some of our worst decisions are taken when we are reacting to short term events in our long term portfolios.
Q) Which sectors are likely to turn out to be leaders and laggards of the next bull run?
A) While at the broad level, the selection will be guided by changes in consumer behaviour and purchase patterns, it will be important to remain company-specific.
We will continue to prefer businesses with strong balance sheets and larger market shares. The ability of such companies to access both debt and equity capital will be very high once the dust settles.
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