As a young cricket fan, one of the things to look forward to was to get up early in the morning to watch the Men in Blue batting on the bouncy tracks of Australia, with almost the entire fielding side lined up in the slips. The great Indian batsmen of that era would take great pains to “judge” and leave most deliveries outside the off-stump. One’s young inquisitive mind would ask the question: why aren’t these gods of cricket being bolder and hitting the balls into the vast empty spaces (which was most of the field incidentally) like they would do on the more batsmen friendly pitches of the sub-continent. The answer, not so obvious then, lies in the relative probability of success or failure in playing such a shot in Australia vs in the sub-continent.
Defence can be the need of certain conditions, whereas offence may be more suitable elsewhere. The conclusion is that to be a successful “all-condition” batsman, one needs to have multiple batting techniques in the arsenal. The attack is as important as the defence. And the most important is to know when to use what.
Market volatility
The past 18 months have been a rather testing time for people in general, and a roller coaster ride for market participants.
This period has seen a sharp correction initially in the stock market and then a rebound, which has continued for most of the last year, with intermittent bouts of nervousness.
This rebound has been riding the coat-tails of abundant liquidity, buoyed by earnings, vaccination-driven opening-up and pent-up demand. While bond yields have been low globally, the IPO market is rife with offerings. Some are from the exciting new-age businesses, heralding a new era for the economy and markets.
People who have been invested through this period have been well rewarded. Irrespective of which category one is in, the key question in investors’ minds is what next and where and how to invest now.
As we experience the events of the recent past, and think of what the future holds, certain aspects stand out. Volatility in asset prices is seen across the board: from metals to crypto currencies to Chinese technology stocks.
There is uncertainty around what could be the new normal of economic activity, growth and multiple other key economic parameters in the post-Covid world.
Complexity, especially in business dynamics, is higher now with the role of digital technologies accelerating, often playing a disruptive role. Ambiguity on the sustenance of current inflation, valuations and earnings trajectory is another feature that investors have to contend with.
Investing in a VUCA world
The biggest question on the minds of investors is what next and where and how to invest in this Volatile, Uncertain, Complex and Ambiguous (VUCA) world.
Times are changing. However, the need to save and build wealth is a constant. Investors need to adapt themselves to market dynamics and find the optimal asset allocation strategy that will help them achieve their financial goals.
We are all familiar with the adage “don’t put all your eggs in one basket”, which is especially true in the context of investments.
In the VUCA world, it is advisable to have a balanced asset allocation strategy, ie a judicious mix of equity and debt. At different points of time, either equity or debt performs better, driven by multiple factors.
While equity as an asset class has the propensity to provide inflation beating returns, it also tends to be more volatile.
To insulate against this volatility, investors should balance their portfolio by including debt in their portfolio as this asset class provides steady returns. A balanced asset allocation strategy in the VUCA times can provide superior risk-adjusted returns.
It is equally important that investors be malleable to fine tune their exposure to asset classes to suit market dynamics.
One route available to investors is to choose products offered by life insurance companies that offer life cover in addition to enabling building a savings pool.
These products are linked to funds that offer a balanced strategy with dynamic asset allocation between debt and equity. Within these overall contours, the fund management team can fine-tune the asset allocation according to market outlook and relative attractiveness of the asset classes.
We have been through a challenging phase because of the Covid situation. At the same time, investments in capital markets have been rewarding, especially for the patient, long-term investor, who has allocated wisely. This journey is expected to continue.
As all batsmen, who have been in the game long enough, have to learn to weather bouncy pitches and adverse conditions along the way, investors, too, need to have different strokes for different situations.
Investors, therefore, need to be mindful of the same and to the extent possible, equip themselves with enough options to deal with different conditions. Both attack (equity) and defence (debt) are important tools in the kitty and the most important bit is to use the right tool at the right time.
(The author is Senior Vice-President, Investments and Fund Manager - Equity at ICICI Prudential Life Insurance)
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.