Nifty bulls run for cover amid missile attacks in the Middle East. Is war really a threat for investors?
These different global macro events have the potential to create major volatility in the markets, which in turn starts testing conviction and portfolio strategy. We endeavor to treat such situations individually and on merit. Our objective is to invest in keeping the view on balance and navigating short-term pain while aiming to build long-term outperformance.
Risk in simple terms can be defined as that which cannot be foreseen. We live in a dynamic world where global uncertainties become an intrinsic part of the investing life cycle. We have to be on a constant watch for global factors (financial and non-financial) that could have near to long-term implications on our investments. It could be a sudden spurt in crude and other commodities, risk with manufacturing sites, disruption in supply chains, and freight-related issues, destabilizing of a country’s banking system, structural increase in global bond yields, and war-like situations. These different global macro events have the potential to create major volatility in the markets, which in turn starts testing conviction and portfolio strategy. We endeavor to treat such situations individually and on merit. Our objective is to invest in keeping the view on balance and navigating short-term pain while aiming to build long-term outperformance.Our markets are volatile with recent events of Iran-Israel tensions and the potential for a war-like scenario taking a toll. While we do not purport to be experts on geo-political event outcomes, recent history suggests that these events take some time to de-escalate as global leaders work towards limiting both direct and collateral political implications to countries involved in such attacks. History shows that such conflicts have nearly always created near-term volatility which in hindsight, also show up as long-term opportunities.
Exhibit I above highlights some war-like situations the world has faced in the recent past and market (via headline index) returns in the subsequent 12 months since the conflict broke out. One clear and counterintuitive trend emerges, that the near-term volatility while being high on fear, became a good time to invest. 50 (the most liquid stocks in the large caps space) has historically delivered good returns post the initial turmoil, much higher than the intuitive “flight to safety’’ asset classes returns as an example.
The current conflict could potentially inflict different levels of pain for different economies but the Indian economy is structurally better positioned barring serious oil spikes beyond the imagined levels. Historically, such periods of pain have had a cascading effect by putting pressure on our CAD and in turn on exchange rates and bond yields. But CAD levels are fairly comfortable thus far and the RBI has been holding forth to curtail inflation as seen with the latest print coming in at 4.90%. If the current event does not escalate in any meaningful manner, then rate cuts could be delayed but possible in the latter half of the current calendar year itself.
Outlook
It would be advisable to follow a bottom-up approach to equity investing in the current scenario. The idea is to buy a business from a long-term perspective with one eye on growth and the other on valuations. Investors should position their portfolios to be more inward-looking-to play the India consumption story and capitalise on the dynamics of our country. For instance, explore the Housing theme by having exposure to the Real estate players and quasi-real estate players. The other big theme is consumption and retail, which we believe offers a huge growth opportunity over the long term. Investors can also consider other themes such as hospitality and the potential wave of infrastructure creation that may follow the elections.Tip - Keep a close eye on the volatility of markets, do not get carried away by the noise, and look to take advantage of dips as they present themselves. Deploy cash in businesses that appear strong from a long-term perspective.
Source: Stocks-Markets-Economic Times
