Mint, Dec 27, 2018
The year 2018 has been a reminder that successful investing requires patience and fortitude. Both equity and fixed income investors had a difficult year, as did investors whose asset allocations were misaligned with their risk tolerances. Asset allocation, as always, played a significant role in portfolio performance and volatility.
Crude oil, rising rates and central bank liquidity withdrawal were a toxic cocktail for investors. As we exit 2018, it seems clear that the global economy cannot sustain high crude oil prices, and for now we have seen a meaningful pull back.
Large cap U.S. tech dominance lost some lustre. Facebook, Apple, and Tesla exit 2018 with questions surrounding their growth prospects. Finally, President’s Trump aggressive, entropic, and confrontational style of leadership did not get a seal of approval from voters, as the Republican loss of the House indicates a weakened policy mandate looking ahead.
Meanwhile, the effects of quantitative tightening in the US continued to reverberate across the globe, particularly in emerging markets. The twin effects of high crude prices and US interest rates had a devastating short-term effect on the Indian Rupee, highlighting its vulnerability, although it’s hard to discern any lasting effects. Besides, some of the lost ground has been recovered in recent weeks.
Domestically, the equity mutual fund investor surprised everyone, buying aggressively when capitulation was expected, perhaps a signal of a genuine structural move towards financialisation. Equity SIPs grew almost every month in 2018, now more than a billion dollars a month. Despite the highest selling by FIs since 2008, equity markets held up reasonably well, the damage being largely in small and to a lesser extent, mid-caps.
It would be safe to say 2018 was a year few made money. Bonds and gold delivered sub-par returns and bond-stock correlations during the selloff were positive at times. In the midst of volatility, fear and uncertainty during the days of the IL&FS default, the Indian economy demonstrated resilience, with key assists from the government and RBI.
Key factors in 2019
The domestic economy is benefiting from strong structural effects. Measures aimed at easing capital flows, such as the IBC, are starting to show salutary effects. Manufacturing and services activity remains strong and has picked up this quarter to the best readings in months. The asset quality cycle is stabilising. The risk around NBFCs is abating with each passing day. Credit growth is at its highest in more than four years.
Nationwide electrification, road connectivity and access to online information are picking up where demonetisation and GST left off. A vibrant and aspirational workforce is creating multiplicative, organic growth. Two thirds of the population are below thirty-five years and entering their peak spending years. India is benefitting from a technology leapfrog, rising connectivity, informational access and availability of credit.
Domestically, elections pose a risk but a manageable one at that. Globally, markets are forecasting a Fed that is likely on hold and off the aggressive rate hike path. While the risk of sustained central bank liquidity withdrawal and rate hikes has abated, the prospects of a prolonged and damaging trade war remain a concern, alongside yield curve inversion and concerns related to a slowing global economy.
Your Money in 2019
Not many people would have forecast a decade ago that India would become the fifth largest economy in the world in 2019, and that China, Japan and India would occupy three of the top five slots on the list. A profound shift remains underway that is rapidly gathering momentum.
Globally, geopolitical factors are likely to remain drivers of policy, such as reserve currency status, trade, and crude. These and the actions of the Fed will likely create volatility. But here too, the news is improving. Some members of the Fed are acknowledging slower growth and crude oil has dropped sharply. FIs are recognizing India’s growth and have been buyers of late.
Last year, in this period, we were advising trimming exposure to equities on the back of expected volatility. Today, we see markets consolidating for the next leg up. Should world economic growth slow, it will clearly impact India’s export-oriented businesses, the economy and markets. However, divergence between growing and mature economies is inevitable at some point. As we look out on the horizon, the macro environment appears favorably aligned and India’s prospects look clear and promising.
Staying true to asset allocation principles in the context of individual goals and risk appetites remains as important as ever. Equally important will be playing the long game; that is, extending investment horizons to years, not months, and employing tactical strategies to benefit on the margin from volatility. In other words, a sound portfolio structure, a small number of tactical decisions and otherwise staying the course should remain the operating mantra for investors in 2019.