Keep your investment strategy simple in these complex times

Humanity is passing through a period of profound uncertainty. Decision making in conditions of high uncertainty is a Herculean task. India, struggling with the second wave of Covid infections, faces a daunting task.

The virus has won many battles, but vaccines will win the war. Recently, Dr Anthony Fauci, the highly-respected immunologist and adviser to seven US Presidents, said this on the pandemic: “This is not going to last forever. Scaling up the vaccination is the only solution.”

This appears to be the perception of the market, too. The panic and crash of March 2020 was a rational response to the ‘unknown unknown’. The subsequent market rally is a rational response to the ‘known unknown.’ In March 2020, nobody had a clue to the end game. Now, there is clarity on the end game.

There is a reason to believe that the vaccine will win this war even though the virus won many battles inflicting huge sufferings.

Global economy is bouncing back
The global economy is bouncing back sharply led by the US and China. Latest macro data on jobless claims and retail sales in the US indicate a sharp recovery. The US is likely to clock a 6 per cent growth rate in 2021 and China is set to achieve a 9 per cent growth rate. This impressive expected growth by the two giants can augur well for the rest of the world.

Vaccine-powered recovery in Europe and emerging markets is a clear possibility at this juncture. A 6 per cent normalisation of economic activity in the second half of the year and global GDP growth of 6 per cent in 2021 are a distinct possibility. Stock markets, globally, are discounting this expected favourable outcome.

India’s GDP, corporate earnings estimates will fall short
India’s GDP is estimated to have contracted 8 per cent in FY21. Nifty EPS is likely to be around Rs 510 for FY21. Before the second wave of the pandemic, the market consensus was for a GDP growth of above 11 per cent and Nifty earnings growth of above 30 per cent in FY22.

In the current context of explosive growth in infections and the ever-increasing restrictions on economic activity, these targets are unlikely to be achieved. What will be the hit on growth and earnings will depend on the degree and duration of the lockdowns and restrictions. Now, there is no clarity on this.

Investment: Keep it simple
In these complex times, investment strategy should be simple. Markets, globally, appear strong and resilient. Since liquidity will continue to be abundant and interest rates abysmally low for an extended period of time, markets are likely to remain resilient. A major threat to the market is likely to come from a sudden spurt in inflation and the US Fed abandoning its highly accommodative stance.

But this appears unlikely in the short term. So, it makes sense to remain invested in equity. However, since uncertainty is high, it would be wise to move some profits from equity to fixed income even though fixed income returns remain low.

Around 80 per cent of India’s corporate profits come from the top 20 companies. Most of these blue chips in financial services, IT, oil & gas, FMCG and capital goods will continue to do well. So, it makes sense to remain invested. But since valuations are high, the broader market is likely to outperform, going forward.

But identifying potential blue chips from among the midcaps and smallcaps is no mean task. An ideal strategy would be to invest in midcaps and smallcaps through mutual fund SIPs.