How to benefit from the current slowdown

Last Updated 20 October 2019, 16:31 IST

The current slowdown might be good for your portfolio. This argument on the surface seems antithetical to the idea of a slowdown. However, after some careful analysis and evaluation of portfolio returns in the aftermath of a slowdown, it can be seen that investors do benefit post slow down. Equity investors benefit through windfall gains if they have a sound strategy to weather the storm and if they stay invested through the worst phase of a slowdown.

What the Indian economy is growing through a growth recession where the GDP is growing at a slower pace. Developing economies are different then their western counterparts in terms of the severity of a slowdown, slowdown in a developed economy can snowball into a recession whereas for an economy of the size of India with a population of 1.3 billion there is enough inherent consumption-led growth that provides a growth base to the GDP.

Although there is severe stress in various sectors of the economy, the problems are structural and not cyclical. Structural problems can be addressed through reforms and intervention, cyclical problems are harder to tackle.

In addition, the aggressive push by the Indian government in terms of infrastructure creation with planned investment to the tune of Rs 100 lakh crore would go a long way in giving the growth impetus to the economy.

The government is also working aggressively to restore confidence in the banking sector through fresh capital infusion in PSBs, and enhanced liquidity support to the NBFC sector. Problems in the realty sector are also being addressed through effective intervention in terms of liquidity support and kick-starting of stalled projects.

Taking everything into consideration we have sufficient reasons to believe that the current slowdown would not snowball into a long-winded one and through aggressive government support, the economy would be on track in the next few quarters. Keeping this in mind let’s now focus on how a slowdown is good for investment portfolios, the current slowdown that Indian economy is witnessing is the third since 2008.

In just one and half years post-2008 benchmark Indian equity index, Sensex rebounded a whopping 127% and since then has returned an astounding 400% return in a decade. In the two years immediately following the 2011 slow down Indian benchmarks bounced back and returned approximately 40% during the period.

How to benefit

Recent history suggests that slowdowns in the economy are short-lived given the structure of the Indian economy, equity returns post an economic slowdown are exceptionally high. The current slowdown is a boon for investors who want to put fresh money to work -- several companies with exceptional fundamentals are trading at very attractive valuations. The benchmark indices have started trading at decent Price to Earnings Ratio, several bellwether stocks which are representative of the health of the Indian economy have shed an average of 20% or more. Another aspect of a slowdown is that it triggers a risk-off reaction in the investor psyche, therefore, stocks that are inherently considered risky for -- companies in the midcap, smallcap spaces -- are punished exceptionally hard.

These companies have corrected to the tune of 40-60%, extremely well run companies in the smallcap space are trading at huge discounts. Investors with some risk appetite can, therefore, build a smallcap centric portfolio with potential windfall gains in a three to five-year time horizon.

Existing investors who are sitting on huge losses can take this slow down as an opportunity to restructure and rebuild their portfolios. Investors with some liquidity at their disposal can average down their existing buying in good names and reduce their time and chances of portfolio loss.

Economic slowdown and corresponding equity market correction provides investors with an opportunity to introspect: portfolios that were never adjusted to achieve optimal diversification or have passed individual risk tolerance now become perfect candidates for major portfolio rejig. The slowdown also provides investors an opportunity to identify their real risk tolerance, equity investments are not for the faint-hearted and if the current market conditions are leading to significant mental stress it is advisable that such investors should restructure their equity holdings into debt and other alternative assets. Economic turmoil also creates a window of opportunities in alternative asset classes, likely real estate prices in several metros have come down significantly, the slowdown also presents an investment opportunity in such asset classes, a house which was out of reach a few years ago is perhaps within reach and could be bought as a second investment property.

Key to success

It is impossible to time the start and end of a slowdown, therefore, it is always advisable to be patient and to take advantage of market opportunities through a stepped approach. Investors should deploy their capital in installments and not in one go: this maximises the chances of higher portfolio returns as the average price is lower than individual purchases. In the Indian context, it can be said with confidence that slowdowns do not last for long periods, therefore investors are best served in being patient and in avoiding any hasty investment decisions in a panic. Equity investments have outperformed returns from all other asset classes in the long term and if one has a long term view economic slowdowns are perfect opportunities to generate exceptional returns in a short period of time.

(The writer is the Director at Wealth Discovery/EZ Wealth)

(Published 20 October 2019, 14:39 IST)

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