The year 2022 promises to be an eventful year. The recent hawkish stance adopted by central banks in the west stressing on the liquidity tightening measures may change the narrative of money flows around the globe as we enter 2022. This could be the year of trend reversal. Looking back at 2021 where central banks flooded the economy with easy access to money to revive demand post the aftermath of pandemic.
What followed thereafter was anybody’s guess. Cheap money, chasing high growth, found its way to the emerging markets (in the form of FII flows) giving rise to one of the fierce market rallies of recent times. Emerging markets including India at present are trading at a premium valuation (thanks to relentless FII buying in 2021). Could the change in central banks stance reverse the FII flows back to the west is a tough question to address.
Emerging markets like India is at a crossroads where pricy valuations coupled with dialling back of easy money policy by central banks across the globe may trigger FIIs outflows. This could mean that Indian stock market could be exposed to FII outflows as we enter 2022. But let us look at the other side. Domestically, Indian economic growth is structurally in a sound position as compared to our peers.
For instance, domestic retail participation is strong and anchoring on the inherent demand revival, high frequency macro data continue to surprise on positive side, with rapid inoculation India has been managing the new variant outbreak, economy has gradually opened up with businesses up and running, business confidence index is at record high, recent hardening in commodity prices and crude prices bodes well from government fiscal perceptive. Thus, if India continues to stick on to its GDP growth, we might see equity market holding on to its pricy valuation.
This tussle between the Domestic optimism and FII flight to safety may trigger volatility in equity markets. Many experts expect equity markets to remain highly volatile in 2022.This means it will be testing time for investors adopting pure equity or high beta portfolio. So, the question arises, having generated wealth in the last 18-20 months, Is there a better strategy that suits current situation?
There may be many other strategies which may perform better than equity focused strategy especially at a time when markets are inbuilt with high uncertainty factor. Multi asset allocation could be one such strategy that one may resort to at such times.
Multi asset allocation is an investment style where investors diversify by investing in different uncorrelated asset class, such that any sharp correction in one asset class does not have any cascading impact on other. There are many forms of Asset allocation combinations currently available with asset class based on the risk appetite of investors such as Equity, debt, gold, commodity, currency, real estates, Real Estate Investment Trusts (REITS), Infrastructure investment trusts (InvITs) etc.
Multi asset allocation strategy is an all-weather strategy, but it has an increasing relevance in the current scheme of things. Multi asset allocation strategy, may yield results when markets are in a transitory mode where money juggles around various asset class (due to uncertainties) before settling on to a particular asset class. We are in no different situation today. With markets expected to swing between debt and equity due to liquidity tightening by central banks, it makes sense for one to have mix of Equity & Debt in his portfolio.
Asset allocation strategy based on fundamental approach could be an effective way to navigate the volatility. One may choose to add other elements like gold and real estate as per one’s risk appetite and knowledge. Today Mutual funds offer various asset allocation schemes across different combination of asset classes. Multi asset allocation fund has proven to be beneficial over a longer period.
Investment is a long term play and one should aim to achieve higher CAGR over a long term. Stock market in the last year has yielded good returns and investor should aim to extend this over a long term. This can be achieved if investor safeguards its wealth from erosion due to market movement. Asset allocation could be that missing piece for investors which may offer a touch of stability to one’s portfolio thereby sustaining the long term wealth.
Diversification of assets help in reducing impact of adverse movement in equity market as investment in other asset class like Debt, gold etc provides stability to the portfolio. Adopting asset allocation is easier said than done. It involves having an unparallel knowledge and understanding of various asset classes. Investor with limited knowledge trying to adopt asset allocation strategy by themselves may run risk of incurring loss if they are unable to gauge the changing dynamics of asset class. It is therefore advised to take guidance of the financial adviser or invest in Dynamic Asset Allocation funds offered by various mutual funds.
The author, Dinesh Pangtey, is Chief Executive Officer at LIC Mutual Fund Asset Management Ltd. The views expressed are personal
First Published: IST