Article

Investment Strategy in the Midst of this Slowdown

05 Sep 2019

The GDP growth for the June quarter has fallen to a 7 year low of 5%. That is just one of the indicators. PMI manufacturing and PMI services are showing loss of momentum. The latest core sector growth is tepid at 2.1%. But the biggest signs of a slowdown are there in the corporate numbers. Automobile companies are displaying signs of a sharp fall in sales with volumes falling by 30% on a y-o-y basis each month. In August, truck sales have fallen by over 60% giving you an idea of the risk of an economic slowdown.

That brings us to the second part of this question. Should you just remain passive and hope for the slowdown to recede? Instead, should you formulate an active strategy to make the best of an economic slowdown and add value to your investments? Hope is a great breakfast but a bad supper; so it is always better to adopt an active strategy. Here are five aspects of your investment strategy in an economic slowdown.

1) Stick to your financial plan; it will never let you down

That is the cardinal rule. You obviously have a financial plan that is designed to help you meet your medium and long term goals. These include goals like paying margin for your home loan, creating a nest egg, planning for retirement, planning for your child’s education etc. The moral of the story is not to tamper with the financial plan too much. Economic slowdown means you may have to cut down on some of your outlays. Ensure that you don’t compromise on goal allocations. Financial plans are designed to even out such intermittent phases of rapid growth and weak growth. Stick to your plan!

2) Slowdown separates the men from the boys; so should you

This is very true for stock investments. Quite often you wonder as to why some stocks manage to hold up even in a sector where most others are plunging. Even these stocks do correct but manage to recoup quickly. An economic slowdown is the time to shift your portfolio decisively towards quality stocks. Take the NBFC sector. Bajaj Finance has managed to hold value a lot better than Dewan Housing or Indiabulls Housing. Take a look at the private banking space. HDFC Bank or Kotak Bank holds value much better than a Yes Bank, IndusInd Bank or RBL Bank. An economic slowdown is the time to make the shift. You not only gain from performance but also from valuation divergence.

3) Be greedy when others are fearful; you could land up bargains

Ironically, most of us don’t look at equities in the same way as we look at bargain. If you were willing to buy a stock like Eicher at Rs.33,000, there is no harm in buying the stock at Rs.16,000. We don’t know for sure if this is the bottom but we know for sure that the auto business is not vanishing anytime soon. Similarly, FMCG stocks have been beaten down on fears of consumption slowdown. Should you buy Britannia at Rs.2,300 since you were more than willing to buy the stock at Rs.3,100? Again, biscuit and cheese demand is not going away anytime soon. If you look at it that way, opportunities are surely enticing.

4) Look at global stories; they are a natural hedge

It is not that the economic slowdown is restricted to India. Almost every market across the world from the US to Asia is slowing. But then each economy has some unique aspects. The US is strong on technology and innovation. Latin American economies are strong on natural resources. South East Asian economies are strong exporters. This is the time to look at allocating part of your portfolio to international assets. It is not just about buying IT stocks and pharma stocks. We are talking about buying international ETFs and taking a direct exposure to other indices and sectoral themes. It can add a lot of value in an economic slowdown.

5) Don’t forget the value of gold in a slowdown; it certainly glitters

When the economic going gets tough, the one asset class that most investors trust is gold. That explains why gold has rallied from $1200/oz to $1550/oz in the last one year. As long as the economic slowdown is real and asset classes are volatile, gold will continue to be a major attraction. Of course, don’t go overboard on gold. You can increase your allocation to gold closer to the upper limit of 15% of your portfolio.

The message is to take an active approach to your portfolio in the midst of an economic slowdown. Apart from the pain, the slowdown also brings opportunities. That is what you must really focus on! 

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Investment Strategy in the Midst of this Slowdown

05 Sep 2019

The GDP growth for the June quarter has fallen to a 7 year low of 5%. That is just one of the indicators. PMI manufacturing and PMI services are showing loss of momentum. The latest core sector growth is tepid at 2.1%. But the biggest signs of a slowdown are there in the corporate numbers. Automobile companies are displaying signs of a sharp fall in sales with volumes falling by 30% on a y-o-y basis each month. In August, truck sales have fallen by over 60% giving you an idea of the risk of an economic slowdown.

That brings us to the second part of this question. Should you just remain passive and hope for the slowdown to recede? Instead, should you formulate an active strategy to make the best of an economic slowdown and add value to your investments? Hope is a great breakfast but a bad supper; so it is always better to adopt an active strategy. Here are five aspects of your investment strategy in an economic slowdown.

1) Stick to your financial plan; it will never let you down

That is the cardinal rule. You obviously have a financial plan that is designed to help you meet your medium and long term goals. These include goals like paying margin for your home loan, creating a nest egg, planning for retirement, planning for your child’s education etc. The moral of the story is not to tamper with the financial plan too much. Economic slowdown means you may have to cut down on some of your outlays. Ensure that you don’t compromise on goal allocations. Financial plans are designed to even out such intermittent phases of rapid growth and weak growth. Stick to your plan!

2) Slowdown separates the men from the boys; so should you

This is very true for stock investments. Quite often you wonder as to why some stocks manage to hold up even in a sector where most others are plunging. Even these stocks do correct but manage to recoup quickly. An economic slowdown is the time to shift your portfolio decisively towards quality stocks. Take the NBFC sector. Bajaj Finance has managed to hold value a lot better than Dewan Housing or Indiabulls Housing. Take a look at the private banking space. HDFC Bank or Kotak Bank holds value much better than a Yes Bank, IndusInd Bank or RBL Bank. An economic slowdown is the time to make the shift. You not only gain from performance but also from valuation divergence.

3) Be greedy when others are fearful; you could land up bargains

Ironically, most of us don’t look at equities in the same way as we look at bargain. If you were willing to buy a stock like Eicher at Rs.33,000, there is no harm in buying the stock at Rs.16,000. We don’t know for sure if this is the bottom but we know for sure that the auto business is not vanishing anytime soon. Similarly, FMCG stocks have been beaten down on fears of consumption slowdown. Should you buy Britannia at Rs.2,300 since you were more than willing to buy the stock at Rs.3,100? Again, biscuit and cheese demand is not going away anytime soon. If you look at it that way, opportunities are surely enticing.

4) Look at global stories; they are a natural hedge

It is not that the economic slowdown is restricted to India. Almost every market across the world from the US to Asia is slowing. But then each economy has some unique aspects. The US is strong on technology and innovation. Latin American economies are strong on natural resources. South East Asian economies are strong exporters. This is the time to look at allocating part of your portfolio to international assets. It is not just about buying IT stocks and pharma stocks. We are talking about buying international ETFs and taking a direct exposure to other indices and sectoral themes. It can add a lot of value in an economic slowdown.

5) Don’t forget the value of gold in a slowdown; it certainly glitters

When the economic going gets tough, the one asset class that most investors trust is gold. That explains why gold has rallied from $1200/oz to $1550/oz in the last one year. As long as the economic slowdown is real and asset classes are volatile, gold will continue to be a major attraction. Of course, don’t go overboard on gold. You can increase your allocation to gold closer to the upper limit of 15% of your portfolio.

The message is to take an active approach to your portfolio in the midst of an economic slowdown. Apart from the pain, the slowdown also brings opportunities. That is what you must really focus on!