Creating Wealth With Various Asset Classes In 2020

Everyone wishes to have a pool of investments that could yield maximum returns. But, at times, they undermine the associated risks with those instruments and end up creating something which finally leaves a bad taste. Undoubtedly, equities as an asset class top the investors’ list when it comes to maximising the return but the risk is equally high, we can understand the same by having a look at the performance of broader markets in the last two years. 

A new year comes with its own set of challenges and opportunities and here we’re trying to strike a balance among the different asset classes, keeping in mind the scenario at hand. Apart from equity, asset classes that can be considered for investment in 2020 could be gold and debt (bonds). Equities generally yield the highest returns amongst the asset class and therefore depending upon risk appetite and investment goals, one should have reasonably good exposure to equities, which could vary anywhere between 50 and 70 per cent. However, equities tend to be volatile when there are economic growth concerns and when market valuation looks stretched. 

Now, let’s have a look at other asset class i.e. gold. In 2019, gold – a hedge against market fluctuations gave higher returns (~25 per cent) than the Indian benchmark indices. Going into 2020, further escalation of geopolitical tensions between the US and Iran, concerns of economic slowdown as well as US election (in the latter part of the year) may cause market volatility and hence investors should have exposure to gold as well. 

However, being a safe haven, gold investment should be looked for stability rather than yielding strong returns over a period of time. Ideally, gold can form 5-15 per cent of one’s portfolio. And lastly, debt funds are suitable for risk-averse investors as returns from debt or hybrid asset class tend to be more stable and fixed. However, since debt returns tend to be range-bound, the exposure can be limited to 15 to 20 per cent. We believe that in 2020 where volatility could remain high, asset allocation and investment via SIPs could be one of the ways to create wealth across different market conditions.

Coming to Indian equity markets, we believe that the recent run-up is largely factoring in recovery in the economy in the coming quarters. However, the run-up has primarily been driven by select large caps that remained unaffected by the slowdown. On the other hand, broader markets, both BSE mid-cap and small-cap have grossly underperformed the benchmark indices in the last two years owing to  several reasons including the prolonged aftermath of the NBFC crisis. 

Nonetheless, going forward, while we are cautiously optimistic about Indian markets, we believe that the broader market is likely to buck the trend of the last two years and could outperform in 2020. There are a number of factors that work in favour of this narrative. 

First, given the correction and followed by underperformance, the broader markets offer valuation comfort at current levels. Further, recent government announcements to revive the economy augur well for the growth prospects of these companies as it will lead to better earnings visibility. Having said that, we do not expect the rally to be broad-based as witnessed in 2017 and believe that company with corporate governance issues, higher debt and low earnings growth would continue to struggle to make a mark. Therefore, it would be prudent to be selective in this space and stick with companies having a sound fundamental track record and strong corporate governance.   

In 2020, investors should allocate funds to sectors that offer value at current levels. We suggest higher allocation to domestic sectors as we recent government measures would start reflecting on growth in the coming quarters. Having said that, we believe that the outperforming sectors of 2019 may continue to do well; however, we expect other sectors like auto, FMCG, capital goods and infrastructure to outperform. This would be led by an anticipated revival in demand and consumption as well as pick up in public or private capex. In addition, metal would be one sector to watch out for as easing trade tensions and signs of global economic recovery would aid realizations leading to higher growth. Therefore, given the current set up, we expect broad-based sector participation in 2020. 

To conclude, a balanced portfolio- with investments in equities, debt and gold in the given proportion could result in better returns in 2020. And, it would also help in calm the nerves in the uncertain and volatile times.

The author is the Vice President, Research at Religare Broking