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Asset diversification in times of volatility: Here's what Axis Securities' recommends

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The brokerage notes that six times in the last 10 years, the multi-asset portfolio have given better returns than just equity portfolios.

Asset diversification in times of volatility: Here's what Axis Securities' recommends
2020 has been a very volatile year for the domestic as well as global indices. While equity markets fell sharply and subsequently saw a tremendous recovery despite poor macros, gold has been on a continuous steady upward trend. Amid the inconsistencies, diversification in assets seems to be the key to maximize the returns.
In a recent note, Axis Securities mentioned that different asset classes return varies during different market events, and with the right allocation downside risk can be minimised. For all the equity market correction events, multi-asset portfolio returns are better than equity returns, it added.
Equity
Since December 2017, Nifty has delivered a return of just 8 percent. Out of which, the top 10 stocks by free-float market cap have delivered a stellar return of 25 percent while the remaining 40 stocks contracted by 12 percent, noted the brokerage. This divergence has widened in recent months, based on the top 10 stocks the adjusted Nifty value works out to 13,212 levels while the remaining 40 would lead Nifty to just 9,227 levels, it further explained.
It also added that currently, midcaps look more attractive than large caps, due to excess liquidity and higher risk appetite in the market. Value continues to outperform but traction building in growth and quality and stock picking is the key, it stated.
Top Picks: ICICI Bank, ITC, Manappuram Finance, Bharti Airtel, HCL Tech, Mind Tree, Varun Beverages, CCL Products, Aarti Drugs, Biocon, Minda Industries, NOCIL, and Endurance Technologies.
Fixed Income: Neutral
July retail inflation rose to 6.93 percent, higher than consensus expectation on account of higher food prices. Due to this, higher-end yields crossed 6 percent the first time after three months, the brokerage mentioned. The yield later smoothened down in the last one week after the intervention by RBI by applying unconventional tools of OMO and operation twist to maintain stability in the financial system. In CY20 till now RBI has provided a rate cut of 115 bps, which helps the bond yield to smoothen down.
"Though spreads have smoothened down but still remain at elevated levels, due to thin volumes and risk aversion in the market. We believe bond yields continue to be smoother for the near term which results in the best case for long term investment in the equity market," it added.
Gold: Overweight
During these uncertain times, Gold has emerged as a promising asset class and performed strongly. On a YTD basis, Gold has given 32 percent returns in rupee and 30 percent returns in the dollar, with the weakening of the dollar this gap, has reduced significantly in the month of August.
Later some profit booking was seen in Gold, which limits the further rally during the month. The brokerage continues to be overweight on Gold and recommended to add more in dips.
The brokerage notes that six times in the last 10 years, the multi-asset portfolio has given better returns than just equity portfolios.
Even in 2020, while equity benchmarks have fallen 8 percent, with gold up nearly 42 percent and debt and RD giving 5 percent and 7 percent returns, respectively. The multi-asset portfolio return would stand at around 7 percent despite the pandemic.
Meanwhile in 2019 as well, equity gave 12 percent returns while gold rose over 24 percent. Including a 10 percent rise in debt and a 6.7 percent decline in FD rates, the total returns for multi-asset portfolio came in at 13 percent.
Note: Equity represents Nifty index, Gold is MCX gold spot prices, Debt is Crisil Composite Debt Index, FD is SBI Fixed deposit rates (1-2 year). The portfolio is made up of Equity (40 percent), Debt (40 percent), Gold (15 percent), FD (5 percent).
Here's the portfolio the brokerage recommends:
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