War drums and staying the course

Two interesting terms which we associate with Russia are Black Russian (which has nothing to do with Russia or Russians except the use of Vodka) and Molotov Cocktail (which has nothing to do with alcohol). But these days decision makers across the world seem to be imbibing one and lobbing the other simultaneously, case in point being the escalation of hostilities around the Sea of Azov.

If the pandemic-related disruption of supply chains and inflation was not bad enough, nuclear sabre rattling and call to conscription (state-mandated call to join the military) wobbled world markets. The icing on the cake was a tandem rate hike by major central banks, sinking markets, paring most of the gains from the last few months in a correlated drop. Marquee NASDAQ100 ($NDX) in the past six months has lost 21 per cent while the broader S&P500 lost close to 16 per cent. Gold, bonds and oil show similar stresses dropping more than 10 per cent for the period.

Indian markets have been resilient thus far on the back of foreign interest in both equity and debt markets as valuations as well as growth started to look stable. Within India, it has been a different story with equity mutual funds crashing from Rs 17,679 crore in May to Rs 5,942 crore in August (out of this, ~Rs 3,000 crore is new fund offer (NFO) money) showing investor wariness with equity markets. During this period the Nifty sank from 17,069 to 15,293 levels in mid-June and back to 17,629 as of Thursday but barely showed a 2.25 per cent return over the period.

Ordinarily, rising interest rates are good for risk-averse savers, but this time around, while an inflation-fueled cost rise was compounded by higher borrowing costs, a consequent rise in deposit rates is yet to be seen. At a broader level, there are a few lessons we have learnt from previous down days/weeks/months or even years.

Staying invested is important: Even if you do nothing, broader markets have always recovered and made new highs. One way to even gain from drawdowns is to stick with a longer-term asset allocation with more than two asset classes i.e, do not have just bonds and shares but look at others like gold, Real Estate Investment Trust (REIT) / Infrastructure Investment Trusts (InVit), commodities and international markets.

Short-term focus can be a portfolio destroyer: Even a basic 60:40 debt-equity portfolio does an excellent job of lowering risk and delivering a respectable performance over a three to five-year horizon. A return to former highs can be swift or slow but investing with goals in mind will result in portfolios which can brush off everything from volatility, deflation, inflation, recession, and even geopolitical turmoil like wars.

Last but not the least, there is always something of value even in these times. Notwithstanding the gloom and doom, there are unseen benefits least of which is the bond market. These days yields are attractive with which one can readily build an FD-beating and tax-optimised bond portfolio.

Should the 10-year benchmark Government of India bond recede back to sub-6 per cent levels, we are looking at double-digit returns while in equities, as the world rightens itself coming out of the pandemic and a possible war in Ukraine, valuations are beginning to look attractive.

Investors therefore would be better off if they stay the course while selecting those ubiquitous lotuses in the swamp. As always, do consider a SEBI-registered investment advisor should you need assistance with your portfolio.