Year 2020 has been a very eventful year so far. In past six months many events have taken place which will have long term repercussions. In that sense these six months could be compared to the period between May 1990 and December 1990 . While long term implications of these events will unfold over many year to follow; in the immediate term we have seen the global economy slipping into one of the worst recessions since the great depression of 1930s . The corporate earnings have been greatly impacted in 4QFY20 and 1QFY21 by the COVID-19 induced lockdown; and the visibility of next few quarters is also clouded. The earnings estimates for FY21 and FY22 have been significantly moderated accordingly.
The performance of stock markets however appears materially diverging from the economic and corporate performance. A sharp outperformance of midcap stocks, especially those with relatively poor earnings stability and outlook has raised concerns about bubble like conditions in the stock market On the other hand it has also made many investors who choose to change their asset allocation in favor of cash and high quality debt, anxious about sharp underperformance of their portfolios. I had also tried to address this dilemma of investors’ besides outlining my strategy in the present circumstances.
After completing the midyear review of the markets, economy, corporate performance, my portfolio performance, and extant investment strategy, I am quite satisfied with my investment strategy and no need to make any changes. I may share the main features of my current investment strategy as follows:
Lock down restriction may be fully lifted before 30 September 2020 and normalcy may return in businesses and logistics by 31 December 2020.
· Interest rates may remain lower for longer.
· Chemical manufacturing in India may see great impetus as global supply chain looks to shift from China.
· Poverty shall rise and so shall the efforts to alleviate it, bringing greater focus on food production and availability.
· India will be able to become part of some meaningful trade blocks that may emerge post lockdown
Equity investment strategy
Continue to focus on a mix of large and mid cap stocks, with decent liquidity, solvency ratios and operating leverage.
(a) Overweight on healthcare services and IT services sectors with 35-40% allocation to these two sectors.
Be mindful of the possibility that India may actually just participate in the global trend and not much may be achieved on the ground in the areas of healthcare services. So buying established businesses at reasonable valuation would be a key consideration.
(b) Underweight financial services and discretionary consumption.
(c) Add agri inputs and chemicals.
(d) Target 12%-13% price appreciation from my equity portfolio in next 12 months.