Navigating Market Volatility: Time To Reassess Investment Strategy

In the wake of post-Covid market highs, equity investors face a challenging landscape shaped by sticky inflation, a strengthening US dollar, and geopolitical uncertainties. With emerging markets under pressure and traditional risk-free assets offering elevated returns, the appeal of equities is waning

The equity markets in the last few years, post-covid, in India had a phenomenal run despite a few hiccups. TINA (there is no alternative) was the way investors embraced this asset class, initially liquidity-driven, then due to the recovering growth with controlled inflation and then sustained GDP performance. The last two quarters, particularly, have gone against this tide of rationale. Stuttering growth, sticky inflation, strengthening US dollar and geopolitical uncertainty has all compounded the concerns.

The strong US dollar has been creating turmoil across the emerging markets as their currencies began to depreciate. The US is going through a unique situation where the economy is doing good but on a reducing interest rate cycle with about two cuts into the year, though would be data dependent. Despite the cooling interest rates, the bond yields continue spike attracting more dollars into the US and thus scarcity in the market resulting in emerging market (EM) currency depreciation.

This impacts the effective attractiveness for the riskier assets as return threshold on risk-free (US bonds) is elevated thus decreasing the appeal for EM equities.This situation hasn’t turned up just with the dawn into the new year. This has been brewing all through last year but when one looks at the yearly returns, investors see a positive outcome but it was the extremely sharp pickup in the dollar rally that’s gained a different momentum.

Add to the mix is the uncertainty of the policy decisions from the incoming US administrations and the repercussions to the asset performance. The other workhorse, the Chinese economy is in doldrums and their monetary & fiscal prop-ups are falling short to instigate a revival. The is causing further volatility to the Indian equity markets which are already primed with peak valuations. While it’s just not the equities that are taking a beating, the hardening dollar is creating a rampage across the assets.

While no period of performance or underperformance is permanent in stock markets, these’re testing times for investors. if one were to investigate the performance of other assets like gold, debt, etc. they too have done extremely well during the same phase of post-covid. This thus calls for a judicious approach to investing than going headlong into equities.

While equity corrections are common as feature, we’ve not witnessed any serious levels of reduction during this period, i.e., up to 20 per cent of more. There’s a growing unease with the current situation that we may witness one such in near future, at least from the highs. It’s worthwhile now to be vigilant about the risks one is taking and re-check the overall risk one is exposed to.

If one is too skewed to riskier assets, not by design, as the markets have rallied and so could’ve occupied a higher allocation than envisaged or planned then it’s time for the investors to cut down the exposure and realign the portfolio to suit their respective risk tolerance. With more headwinds through slowing growth, earnings slowed down and persistent inflation, the prospects are bleak for equity market and hence presents a good rationale to book profits.

Diversification and asset allocation now rule key to the experience of wealth creation in the short- to-medium-term horizon. While so much is mentioned about the equity (NIFTY 50) performance in the last five years, about 15 per cent, gold ETFs have remarkably done logging in about 13 per cent CAGR during the same time. The US stocks (S&P 500) has also delivered a similar return over the period. There are other diversification opportunities like Real Estate Investment Trusts (REITs) and Investment Trusts (InViTs) which have better return profile than Fixed deposits in the debt category.

These are times when the contribution of various assets in the portfolio comes to fore as they also mitigate the risk, providing better risk-adjusted returns.

(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at [email protected])