Governor Olli Rehn: Dialling back monetary restraint
H1CY20 Investment Strategy Review
1.
2. Global Events H12020
1. The WHO declared COVID-19 outbreak as a pandemic. Over eight millions people across the
world are infected. Many countries enforced partial to total lockdown of all economic activities
resulting in one of the deepest recession the global economy has faced in past 100 years. The
global economy is expected to contract by 4-6% in 2020.
2. The central Bankers across the world announce massive monetary easing to mitigate the
economic impact of the pandemic and engineer an economic revival.
3. Over one million protestors took part in the New Year march in Hong Kong. This was perhaps
the largest public protest against the Chinese authority, and prompted the Chinese regime to
implement new security laws in Hong Kong, virtually ending its autonomy from the mainland
China. Later UK Prime Minister said that they will amend UK citizenship laws to permit
citizenship.
4. Death of George Flyod, leads to one of the largest public protest and riots in US since Martin
Luthar King (Jr) led civil rights movement. The protests were organized across the world in
against the racist bias in US & police brutality and in solidarity with the ethnic Indian American
community.
5. The United Kingdom and Gibraltar formally withdrew from the European Union culminating the
process which started with a referendum in June 2016.
2
3. Global Events Cont..
6. A US drone strike at Baghdad International Airport killed a senior Iranian general and Iraqi
paramilitary leader. In apparent retaliation Iran launched ballistic missiles at two Iraqi military
bases hosting American soldiers, injuring many personnel. A misdirected missile shot by
Iranian forces, struck a Ukrainian civilian aircraft, killing all 176 people on board. Iran also
deployed its first military satellite in the space.
7. After a long standoff in Doklam in 2017 (in which no casualties were reported), another
serious engagement took place between Indian and Chinese forces on LAC in Ladakh. Many
casualties and serious injuries have been reported from both the sides. This has brought the
Sino-Indian relationship to a new low since 1975, and threatens to change the geo-politics
and economics of the South Asian region forever.
8. The disagreement surface in the oil cartel (OPEC+Russia) leading to massive crash in global
crude prices. The WTI Crude oil future settle at minus $37.63 in April expiry as the buyers
failed to take delivery due to shortage of storage space.
9. The Saudi Arab led coalition declares unilateral ceasefire in military action against forces
Houthi forces in Yemen to end the five year old war.
3
4. Key message
1. Lock down restriction may be fully lifted before 30 September 2020 and normalcy may
return in businesses and logistics by 31 December 2020.
2. Interest rates may remain lower for longer.
3. Chemical manufacturing in India may see great impetus as global supply chain looks to
shift from China.
4. Poverty shall rise and so shall the efforts to alleviate it, bringing greater focus on food
production and availability.
5. India will be able to become part of some meaningful trade blocks that may emerge post
lockdown
4
5. Strategy
Equity investment strategy : After completing the midyear review of the markets, economy, corporate
performance, our portfolio performance, and extant investment strategy, we are quite satisfied with our
investment strategy and no need to make any changes. We may share the main features of our current
investment strategy as follows:
Continue to focus on a mix of large and mid cap stocks, with decent liquidity, solvency ratios and
operating leverage.
a) Overweight on healthcare services and IT services sectors with 35-40% allocation to these two
sectors.
Be mindful of the possibility that India may actually just participate in the global trend and not
much may be achieved on the ground in the areas of healthcare services. So buying
established businesses at reasonable valuation would be a key consideration.
(b) Underweight financial services and discretionary consumption.
(c) Add agri inputs and speciality chemicals.
Asset Allocation
5
Investment Goals and Strategy for next 12 months
Asset Class Stance Present allocation Standard Allocation Target return
Growth - Equity OW 70% 60% 12% to 13%
Income - Debt EW 25% 30% 5% to 5.5%
Safety - Cash UW 5% 10% 3.50%
Overall 100% 100% 9% to 10%
6. Mid Year Review
The last six months have been one of the most volatile periods for financial markets in many
decades. The prices of stocks, commodities, and bonds have swung wildly in these six months.
The stock market resilience has surprised most market participants; while gold has also given
decent return.
Greed begins to overwhelm fears
Despite a spate of terrible economic, political and geopolitical events, the greed has started to
overwhelm the fears since the market made a panic bottom in March 2020. The midcap stocks
have outperformed the benchmark indices, and the small caps have also started to catch up
recently.
1. The benchmark Nifty is negative ~15% YTD (22 June 2020), whereas Midcap are down (-
13%). Small cap index is down by 20%.
2. Overall market breadth has turned marginally positive for the YTD.
3. Foreign investors turned big sellers again after remaining net buyers in 2019. Domestic
mutual funds bought more than the FPI selling. Net institutional flows have been thus
positive YTD. However, in recent funds the net new flows into the equity mutual funds have
slowed down.
4. Pharma is the only sector that has returned positive yield YTD. Other defensive sectors like
consumers, FMCG and IT have also outperformed the benchmark indices.
6
7. Review Cont..
Global equities recovered but still yielding negative return; India average performer
Many developed markets staged a sharp recovery after March meltdown and recovered most of
the losses. Developing markets have though struggled. India with -14% YTD return has been
an average performer.
Despite all ominous news flow, China and Korea have been the best performing markets
amongst the leading global markets.
Bonds rally as rates are lowered
Interest rates have trended down almost everywhere, leading to a smart rally in bonds. US
benchmark yields have crashed from close to 2% in the beginning of year to about 0.7%. Indian
benchmark yields also corrected to the lowest since 2009.
Gold and Bitcoin record smart recovery
Amidst the global uncertanties and rising risk, gold emerged as a safe heaven. The gold prices
in USD terms have gained over 16% YTD to the highest level since 2009.
The cryptocurrency Bitcoin has gained 33% YTD, as the debate over continuation of USD as
the only reserve currency for global trade intensified post Sino-US trade war.
USD Index weakens marginally, but INR weakens materially vs USD
A dovish Fed led to a marginally weaker USD, even though trade balance showed some
improvement. However, despite significant CAD improvement, INR weakened materially
against USD.
7
8. Review Cont..
Crude oil recovers from unusual fall, but still materially lower YTD
WTI crude oil future witnessed heightened volatility in April, and crashed to negative
territory. However, the entire loss has been recouped. YTD, the global crude oil prices are
down by almost one third as the COVID-199 indiced lockdown has led to demand
collapse.
8
9. YTD2020 Indian Market Performance
9
-20% -15% -10% -5% 0% 5%
NSE QUALITY 30
NIFTY NEXT 50
NIFTY MIDCAP50
NIFTY MIDCAP100
NIFTY 500
NIFTY 200
NIFTY 100
NIFTY
NIFTY SMALL 100
YTD Performance 2020 (till 22 June 2020)
15. Economic Review
15
The global economy is witnessing its worst economic collapse since the great depression
of 1930. Unlike the 2008-09 meltdown, this time the Indian economy is no exception to the
global trend and is witnessing the worst ever slowdown in the history of the post
independence period. In the past 40yrs, since FY80, when Indian economy declined by
5.2%, we have not seen any year of negative growth.
• Economic growth collapses, long term growth curve shift downward
• External vulnerability though less pronounced this time
• Fiscal condition worsens materially, monetary easing accelerates
• Wholesale prices enter negative territory in May 2020
• First synchronized global recession since 1930
37. SEBI Reg No: INP000005349
Investing in securities involves risks. The value of the portfolios may fluctuate and can go up or down. Prospective investors are advised to carefully
review the related documents carefully and in its entirety and consult their legal, tax and financial advisors to determine possible legal, tax and financial
or any other consequences of investing under this Portfolio, before making an investment decision. The value of the portfolio may be affected by factors
affecting financial markets, such as price and volume, volatility in interest rates, currency exchange rates, changes in regulatory and administrative
policies of the Government or any other appropriate authority (including tax laws) or other political and economic developments. Consequently, there
can be no assurance that the objective of the Portfolio would be achieved. The portfolios composition is subject to change and itmay not have any future
positions in the Stock(s)/Sector(s) mentioned in the document. The benchmark of the portfolios can be changed from time to time in the future. Trading
volumes, settlement periods and transfer procedures may restrict the liquidity of investments in portfolios. Individual returns of Clients for a particular
portfolio type may vary significantly from the data on performance of the portfolios depicted in this material. This is due to factors such as timing of entry
and exit, timing of additional flows and redemptions, individual client mandates, specific portfolio construction characteristics or structural parameters,
which may have a bearing on individual portfolio performance. Neither the Portfolio Manager, M/s Adroit Financial Services Private Limited or any of
its officers, directors, personnel and employees shall be in any way liable for any variations noticed in the returns of individual portfolios. Actual
future gains or losses could materially differ from those that have been estimated. The recipient(s) alone shall be fully responsible/are liable for any
decision taken on the basis of this material. All recipients of this material should before dealing and/or transacting in any of the products referred to in
this material make their own investigation, seek appropriate professional advice. The investments discussed in this may not be suitable for all investors.
Financial products and instruments are subject to market risks and yields may fluctuate depending on various factors affecting capital/debt markets.
There is no assurance or guarantee that the objectives of the portfolio will be achieved. Please note that past performance of the financial products,
instruments and the portfolio does not necessarily indicate the future prospects and performance thereof. Such past performance may or may not be
sustained in future. Portfolio Manager’s investment decisions may not be always profitable, as actual market movements may be at variance with
anticipated trends. The investors are not being offered any guaranteed or assured returns. The AMC may be engaged in buying/selling of such securities.
In the preparation of this material the company has used information that is publicly available, including information developed in-house. We do not
warrant the accuracy, reasonableness and/or completeness of any information. For data reference to any third party in this material no such party will
assume any liability for the same. Actual results may differ materially from those suggested by the forward looking statements due to risk or
uncertainties associated with our expectations.