Last year was a watershed year for all asset classes. Equity markets did well and NIFTY notched impressive gains. The allocation in equities has happened mainly through strong inflows from FIIs and DIIs. Another important aspect is a significant shift in the mindset of Indian investors. According to a recent Karvy Wealth report, absolute flows that went into equities were higher than what went into fixed deposits. And, domestic savers have been providing liquidity to the market through inflows into mutual funds, equity PMS and direct stocks.
This change has happened because of three reasons:
Residential real estate has seen significant headwinds, with many stuck with no liquidity and even loss of capital. Oversupply, demonetisation, RERA and GST have played a significant role and there are no signs of recovery soon. Investors are looking to reallocate from real estate to financial assets at any given chance.
Two, domestic interest rates from fixed income instruments have been on a downward trajectory and people are struggling to make even 7 per cent returns in debt products.
Three, with corporate governance being strong, confidence in equities is on the rise. Even though there are periods of volatility, investors have been using every downturn to increase their equity allocations.
In 2018, the risks are higher, and the call tougher, as we sit on attractive returns in equity portfolios. The cost of choosing risk aversion—investing in FDs, for instance—has been high over the last two decades. Staying invested is clearly the right choice. Time and again investors have chosen risk aversion, and the opportunity costs have been large. The market is smarter, faster, and greedier today.
This is where a review of asset allocation makes sense. We think 2018 is the year for taking measured investment calls, which we define as staying invested, but using tactical strategies to stay protected. Some of the strategies investors may want to evaluate include reducing equity allocations, considering hedging via principal or selective protection and moving to specialised managers, within equities, that are focused on absolute returns.
In a nutshell, we are a lot more confident in the medium to long term about equities. Be on your guard and hedge your portfolios. Over the next three years, equities are expected to give 15 to 20 per cent return.
Pant is head of products and solutions, Sanctum Wealth Management.