Investment strategy review - Aug 2020

[Note : Below is the snippet of the newsletter posted to clients on August 21, 2020. Some of the statements are forward looking, the impact of which may or may not be the same as of today. No statement in this should be construed as investment advice. Equity investing is risky, kindly consider an investment advisor before taking any positions]

In April, we had shared our investment strategy and asset allocation for post COVID-19 world (see here).

The strategy was based on the assessment of the situation and the limited information available till then via our Scuttlebutt activities. Though the strategy has worked out very well so far, we must admit that luck and liquidity might have played some part in this.

Our investment strategy and asset allocation remained unchanged in our last review in July. (See here)

We would like to reiterate the following key assumptions in our strategy as follows:

(a) The current crisis is unprecedented in the sense that it has seriously impacted the liquidity, solvency and viability of a large number of businesses, all at the same time. The number of companies going out of business before this crisis ends would therefore be much larger than the crises faced by the global economy in the past 75 years since second world war.

(b) The only way out of this crisis is to inflate a colossal bubble in asset prices, which is equally unprecedented. We believe that the foundation of the next big global bull market will be laid in the next 12 months. Like every time before, the next bull market will be much bigger than the previous one. We shall see a large bubble building in the market that will change many things in the real economy like the internet bubble of the 1990s reshaped the global economy forever. Pharma and Healthcare are likely to lead the bubble.

(c) The new trade and strategic blocks will emerge to provide leadership to the world. The world may de-globalize, localize and re-globalize at the same time. Collective leadership and many smaller common markets like the EU having deeper cooperation may emerge. Digital international highways may become more common than the traditional physical movement of people. The assets and currencies may get further dematerialized. The international travel protocols may change to include medical tests as a prerequisite for all international travel.

(d) People rather than material will become the focus of policy formulation. The demographic trends may see dramatic shifts over the next couple of decades. It could be either through liberal but orderly immigration or incentives to procreate more in developed nations. The developing nation may reverse the trend and implement measures to control population growth.

(e) The global wealth and income inequality may increase to alarming levels. The number of poor (below poverty line) may rise disproportionately across the world, especially in emerging countries. This could potentially trigger a fresh wave of communism across the world fueled by increasingly isolated China and Russia. Food security and a greater investment in agro chemicals will become a key agenda in global politics.

As investors, we are making some changes in approaching the investment strategy and taking following actions:

(a) We shall avoid committing strongly to any specific sector or asset class for the next couple of years. The whole argument of being long-term investors is changing dramatically with the mindset of investors taking investment decisions in their own hands.

(b) We will continue with the "Buy and Hold with regular rebalancing" strategy for selected core stocks. We continue to focus on a mix of mid and small cap stocks, with decent liquidity, solvency ratios and operating leverage. A greater focus on bounce-back ability from the C-19 shock is critically observed.

(c) Given the sharp run up, we reduce equity allocation from 75% to 65% and increase Debt & Gold allocation to 25% and 10% respectively. We will reduce the equity allocation over the next 4 weeks.We will increase the Gold allocation in the same time period, preferably in SIP mode.

(d) We will continue to be underweight in financials and reduce remaining allocation in them to move the weight to non-lending financials (Life & non-life insurance, AMCs, Brokerages, Exchanges, Depositories etc)

(e) We continue to remain overweight on Pharma, healthcare and insurance sectors. Given the sharp run up, some profit booking is warranted to bring it back to the original allocation

(f) We will continue to remain overweight on the specialty chemicals and agro chemicals space with keeping an eye on the supply chain disruptions from China and other countries in the aftermath of C-19.

For any feedback or sales queries, feel free to write to us on [email protected]