A new wave of virus initiated by its latest variants has created a deja vu like situation which reminds us of the March 2020 panic in the stock market. This time the circumstances are further aggravated as India has been witnessing up to 3 lakh cases per day, which is almost double the per day addition of cases in the first wave. Lockdown in the badly affected states and restriction on mobility in most of the other states have been dashing clues for slower economic recovery in the coming days. According to a report by the State Bank of India’s economic wing, due to lockdown in key Indian cities, the country may face an economic loss of the order of 1.5 trillion. The deteriorating fiscal situation accompanied by rising inflation in the country has raised concerns for investors as well as traders. The only thing which is holding the investors from liquidating their holdings is the expectations from the vaccination drive by our government. However, the government could have done better by advance procurement and disbursement of the Covid vaccine. that would have brought about a higher vaccination price that is regionally much slower as compared to its western opposite numbers. According to media reports, this rate is above 40% in the USA and UK but it is just 8% in India.

Decoupled Performance of Indian Markets

The foreign investors are much aware of the above situation. An institutional investor would like to look for better opportunities in the countries which have been handling the Covid situation more efficiently. It is because these countries will have faster recovery rates and better future growth aspects. Perhaps this is the only reason why the Indian stock market has decoupled from other major world markets in terms of its recent performance.

The above infographic represents the performance of major world indices since February 2021. February is important as Nifty made its all-time high of 15431 on the 16th of this month and hence taken as the base for our analysis. Germany, France, and Dow Jones have been leading the rally with a more than a 7% jump from their Feb highs. In fact, all the major indices have been doing better than India with Hong Kong and China in a close race to it. The benchmark Nifty50 gravitated down by 7% from its Feb highs and is trading at 14341. However, It’s worth noticing that most of the damage, more than 6%, was done in the second half of February only. Since then the decline has just been 1% on a weekly closing basis. The Bank Nifty, which comprises 12 leading public as well private sector banks as its components, came off 15.88% from its Feb highs. A possible reason for the consistent underperformance of the banking sector could be the likelihood of an increase in Non-Performing Assets in the coming quarters, as a result of the economic slowdown.

Need for A Prudent Investment Approach

In the last 12 months, we have learned that the stock market is highly unpredictable and life is even more uncertain. One needs to have enough corpus to manage unforeseen contingencies. Ideally, an average investor needs to aim for saving 30-50% of his annual income after taxation. Reconfiguring these savings into high-risk and less-risk assets will generate added returns on investments while controlling liquidity at the investor’s hands. The whole concept of reconfiguration of assets is based upon two fundamental premises, namely historical performance, and future expectations. An asset class would entice investments based on these two premises. as an instance, a fundamentally sound asset with true historic overall performance and higher destiny elements might appeal to greater funds in comparison to the one which is missing any of those essential factors.

The Shield Against Saturation

Now let’s understand the difference between the above two types of assets – high-risk and less-risk. In simpler terminology, the assets which have outperformed (price-wise) in a very short period of time and are overstretched in terms of valuations are riskier for fresh long-term investments. Profitable investors may think of reducing their exposure to these assets. Equities are a suitable example of a high-risk asset class, which has rallied 105% in the last 11 months. The investors who were able to value hunt in March 2020 would be sitting on healthy profits as of now. A gradual shift in exposure from equities could be advantageous for these investors, as the probability of generating another 100% from here is bleak shortly.

On the other hand, the assets which have been underperforming (price-wise) in the short to medium term (3-9 months) and hovering at fair valuations are considered less-risk. These qualify for fresh investment. Gold has been the most recent example. It topped in August 2020 and has undergone a 21% correction in the last 8-9 months. Such healthy corrections can be exploited by the value investors to gradually increase their long-term exposure in this asset class.

Investors can also reorganize their equity portfolio by keeping valuations as a yardstick. Assuming that the investment has been made in fundamentally sound companies, an overvalued stock would be considered a high-risk instrument and an undervalued stock as a less-risk instrument. The investor can reduce their exposure from high-risk and employ the capital in the less-risk instrument. By doing so he can always stay invested while enhancing the possibility of a better return on investments. Reconfiguration in long-term portfolios can also bring some tax benefits as an added advantage to the investors.

Disclaimer: The views about the assets discussed in this article are for illustration purposes only. They should not be considered as an investment or trading advice.