Cutting risk

We are moving to a lower equity allocation

Every day is a new high, across global equity markets. Every indicator indicates optimism and an overbought market. But, has anything changed? A few things have.

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NIFTY P/E has jumped ~40% in 2020

#1 Safe investment options offer lesser returns, thanks to repeated rate cuts

#2 Real estate seems less attractive with lower rents and, as a result, fewer buyers

#3 Across emerging markets, India seems a better destination compared to peers

It’s easy to see why there are more equity investments across global investors — there is simply no other comparable asset class. Meanwhile, this is what happened to crypto.

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Crypto ended the year 6x it’s bottom in March

There is a disproportionate flow to specific assets (equity and crypto) as lesser money moves towards real estate and fixed income. Consider a pension fund that needs to meet a fixed return objective in the US — with near-zero returns in fixed income, the fund needs to increase allocation to equities and venture capital to meet its return objective. Here, India seems a slightly better destination — a little lesser over-valued compared to other global markets.

So, we get a disproportionate amount of the disproportionate amount of equity flow — a double bonus.

All’s well when it works. But, something’s really not changed — actual business risk.

The average life-span of a Fortune 500 company is ~40–50 years — for the NIFTY, this could be ~25–35 years. However, the NIFTY PE is now ~40 — in other words, we will need 40 years of earnings to recover the current stock price (assuming growth takes care of discounted flows).

But how did we get here? Imbalances in the market have always existed. This time, we are systematically prolonging it.

Yes, there will be a reversion to sustainable levels. However, it’s anybody’s best guess as to when this will happen — some say months, others years. We continue to see stimulus measures in the US. At the same time, we also see the other side — last week, the RBI warned of growing asset prices across equity markets.

Everybody knows its overvalued, but there is nothing much you can do because the tap continues to flow.

Allocation changes

We are doing a few things — we are going down one risk level compared to your plan. So, if you were doing a moderate risk portfolio, we would bring it down to balanced and so on.

For some of you, this could involve a restart of equity allocations, albeit a little lesser; for many others, it would mean a continuation of fixed income and gold — it depends on your current asset allocation.

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