Time to Increase Equity Allocation
There is a huge amount of negativity in our Financial markets.
As I pen this article, NIFTY is touching 11,000. Mid Cap (broader market) index is making 3 year lows. At the same time Indian markets are under performing all major global Indices. Technically too, the markets are trading lower than the 200 Day Moving average.
In the last quarter of FY 19, GDP growth has slipped to 5.8%. At the same time as is evidenced in various data growth slowdown is further worsening. None of the Engines that drive our economy are firing – Consumption, Investments or Exports.
Further, the earnings growth that the analyst community has been betting on since last 3 to 4 years, continues to elude us.
The current slowdown has been caused as much by NBFC crisis as the impact of Insolvency & Bankruptcy code. Reduction in crony capitalism too has played its role. To an extant, the Govt. also is responsible for this situation by not acting proactively on certain issue.
However, If I compare the situation now with a year back, I see a silver lining in this climate of doom:
- Yield curve is sharply down along the entire duration (150 to 75 bps).
- This is an extremely positive development & will provide big stimulus to the economy, 6 to 9 months down the line
- Caveat is that the Govt should not back off from the sovereign bond issue that is planned
- Valuations for the broader market now is much cheaper w.r.t a year ago
- There is a Govt with a strong mandate reducing political uncertainties, which has historically been good for the markets
- Macro factors continue to be good
- Fiscal Deficit is contained (in-fact reducing)
- Inflation is in 3 to 3.5% range
- Oil Price is trading in USD 60 to 65 band, which does not strain our economy
Our expectation is that NBFC crisis will get resolved with passage of time. At the same time, reduced crony capitalism along with implementation of IBC code are very positive steps for the economy in the medium to long term.
With a clear mandate that the Govt has, there are reasonable chances that it will implement some of the contentious reforms such as Agricultural, Banking system, Labor and Land.
At the same time, Public Private partnering is a low hanging fruit and all steps should be taken to revive interest of both the domestic and international players. This will be critical to the investment led growth that the recent Economic Survey alludes to.
India is currently in a catch-up phase. As has been evidence elsewhere in the world, with a favorable Govt that is committed to reforms we should be growing in the 9% to 10% band. Even if the Govt. Performance is average, our economy should grow at 6% to 7% rate.
In view of all of above. I feel it is a good time to increase Equity Allocation.
In our model portfolio I am increasing Equity Allocation to 60% range now and will further increase to 65% if market falls more.
With Best Regards,
Wealthspring Advisory Services
Rajesh Prasad /9819006666
Satish Mishra /9324904306