Equity market Investors and participants have gone through market roller-coaster in true sense. March lows were unimaginable in January and Current market was equal surprise from March low. Hence, one question which captures investor’s mind is “Where should we invest now”.
The right thing to do in this environment is to prepare the portfolio for multiple outcomes and make it more robust to safeguard investments.
Spotting Investment opportunity should always succeed and not precede right Investment framework and Portfolio construction and once investors have done these two, search for Investment opportunities should begin.
Deflation: From a macro point of view globally as well as locally, it is clear that we are in a deflationary environment and Deflation means reduction of general level of prices in economy. US 10 Year inflation break even, guage to judge Inflation Expectation in the country suggest US Inflation at 1.6% much below FED target of 2%. Same is the case in other developed economies.
Demand Shock: The world is going to experience collapse in demand which is episodical. World GDP contraction in 2020 will be comparable only to 1945 (World War II). As per IMF, global growth for 2020 will be contracting by 3%.
Monetary & Fiscal Stimulus: Major economies in the world have provided unprecedented monetary and fiscal stimulus and since the start of this year, there has been 144 incidence of rate cuts across the world, except Denmark and Netherlands, who have not reduced rates as both these countries are already under negative rates. Apart from rate cuts, major economies have provided liquidity to market by Quantitative Easing.
US FED has expanded its balance sheet from $ 4.3 Trillion at the start of the year to $ 7 Trillion, of which majority expansion has happened in the last two months.
Additionally Developed economies have provided strong fiscal stimulus to low income house hold as well as business, with Fiscal stimulus being anywhere between 10% to 16% of GDP for these countries.
Conventional logic suggests that in a such a challenged growth environment equity should be avoided or bought only at a deep discount. However, what makes current situation unique is Liquidity. Unprecedented monetary and fiscal easing and near zero interest rate has bring back convexity trade (which means down side is very limited and upside is significant) in favour of equities.
There are few asset class and business which do well in deflationary environment:
- Technology is greatest deflationary force and hence technology companies do well.
- Compare to INR, $ is better placed in terms of currency.
- High Quality leadership with brand as a moat does very well in this environment.
Converting these factors in investment thesis, we believe US large cap equities or S&P 500 is good investment in current environment. While Nasdaq is also good investment opportunity, but given valuation challenge, S&P 500 is better risk adjusted opportunity to invest. One can also look at investing in US Large Cap active fund, after taking advice from your Investment Advisor and if cost charged by fund.
One of the simplest ways to invest in US Large Cap equities is through Mutual Fund route investing in index fund or feeder funds with active management. One can use LERMS ( Liberalised Exchange Rate Management System) route and invest up-to USD 2,50,000 per person in a financial year. Please take expert advice is required to explore this investment option.
It is also imperative to mention risk to this hypothesis. First and foremost, any surprise in terms of US economy not recovering can lead to major disappointment and underperformance. Also, valuation is not cheap, leaving very little margin of safety in this investment. Other specific risk remains of the upcoming US presidency election and on-going protest in US.