Building portfolio immunity and resilience

03 April 2020

7 minute read

Barclays Private Bank discusses asset allocation views within the context of a multi-asset class portfolio. Our views elsewhere in the publication are absolute and within the context of each asset class.

Earlier this year we were expecting no further contraction of demand in the Indian economy; higher government spending; lower rates and better monetary transmission to aid the growth recovery in the second half of 2020. By no means did we anticipate a “black swan” pandemic, infiltrating the two largest democracies, the US and India, whose equity markets we are overweight in and quicker than in our wildest imagination.

Coronavirus outbreak

A full three-week nationwide lockdown to combat the Covid-19 outbreak is more stringent, and far more aggressive than what we had anticipated. We now factor in four full weeks of a complete shutdown, followed by another eight weeks of partial shutdowns across the country until the end of May, as the virus-related precautions will likely remain in the system. We estimate that the cumulative shutdown costs will be around $120bn, or 4% of gross domestic product (GDP). We expect GDP growth of 2.5% this year. Also, we expect GDP to rebound by 8.2% in 2021.

Any further degree of drag on GDP growth will depend on how widespread the outbreak becomes in the country. An epidemic proportions stage (with perhaps material disruption persisting for at least 26 weeks) may potentially lead to near zero to negative growth for 2020. However, considering the front-loaded extreme precautionary measures taken, as seen in the case of China, the probability of such an extended disruption timeline has reduced.

These scenarios assume no new policy support through monetary or fiscal channels, which is unlikely.

Better placed than many

India seems better placed than many to navigate the slowdown given the otherwise stable macroeconomic environment, with stable inflation (oil price war beneficiary and incremental long-term disinflationary pressures), relatively higher interest rates (providing room to ease), contained current account deficit and domestic demand-driven economy with lesser reliance on discretionary consumption.

On the fiscal front, we believe the government’s fiscal targets are unlikely to be met, and the clause for managing natural calamities is likely to be invoked to find fiscal space. This may include the RBI directly placing funds with the government. We expect the fiscal deficit to reach 5.0% of GDP due to additional spends and lower revenues due to weaker growth. This will push the consolidated fiscal deficit to -8.2% of GDP, with risks clearly biased towards higher deficit.

We expect the RBI to undertake sharp, front-loaded rate cuts (165 basis points cumulatively to take rates to 3.5%) along with all the liquidity support and measures needed to avoid liquidity risk converting into solvency risk. These measures may include outright bond purchases through open market operations, possible forbearance for bank loans and targeted liquidity windows for banks and non-bank financial companies.

The RBI may also use unorthodox measures, such as the ability to repo public sector undertaking instruments, RBI buying banks’ certificates of deposit or sovereign borrowing from offshore issuance, among others.

Credit contagion key risk

Beyond the risk of recession triggered by Covid-19, the key risk remains of widespread credit contagion. We believe, however, that it should be contained to some extent, considering the severe risk-off environment already witnessed in the country since late 2018. Also, the monetary policy room available should help in stemming any liquidity gap risks converting into solvency risks. The drag on both the demand and the supply of credit however may languish for longer.

While we cannot predict the potential economic impact of Covid-19 on the Indian economy at this point, we can review the likely impact of the pandemic on the asset classes within your asset allocation plans. Overall, we have even more faith now that our “The Great Polarisation – Winners Take It All” theme is here to stay.

Indian equities

Although monetary and fiscal stimuli commitments have started to pour in, equities may need much stronger support before valuations can find their footing. However, because the correction happened so quickly, capitulation hasn’t had time to set in yet. This leaves us exposed to more downside and a U-shaped recovery as opposed to the V-shaped ones that have been seen in this cycle.

Yet, as soon as the pandemic appears under control, we would expect an equally violent rebound. We believe it will probably take a few rebound sessions, followed by a few days of stability (the VIX fear gauge, for example, remains too elevated), before confidence really begins to return. At this stage, even with a (violent) rebound post stabilisation, we are unlikely to rally back all the way up to the highs seen on 12 February, but we could revisit levels around 10-15% short of that.

Focus on quality

The rebound is likely to be led by beaten-down cyclicals, like energy or materials, and value-oriented sectors, such as financials (as often the case in a “recovery scenario”). While we would expect “value” to lead this rebound, we believe medium-term investors should remain focused on “quality” rather than chasing “beaten-down” names.

We define “quality” as large-caps and larger mid-caps companies with: stable earnings growth visibility, ability to efficiently deploy capital, relatively low financial leverage and dynamic and transparent management credentials.

As the economy reopens, these businesses should continue to gain market share, bargaining power, operating margins, pricing power and lower cost of capital. And with lower corporate tax rates, they should be able to spend on marketing and demonstrate resilience in dealing with a changing economic landscape.

We continue to recommend averaging in over the coming weeks. However, keeping some dry powder available for investing post stabilisation (ideally not before August 2020, by when the April to June earnings should be out) is clearly warranted. For investors who have fully deployed their allocation to Indian equities, any retracements in the market can be used to reshuffle in favour of “quality” stocks.

Indian fixed income

Taking into account our macroeconomic views discussed earlier, while the RBI engages in up-fronted steep rate cuts and injects liquidity, we also anticipate headwinds from a significant increase in supply of bonds from the central banks as well as state governments and public sector undertakings (due to fiscal slippage). This may lead to a bull steepening in bond yield curve over the next three to four quarters, with longer end rates remaining volatile and shorter end rates coming down sharply.

With a 12-15 months’ investment horizon, we prefer investment in high quality AAA corporate bonds and government securities in maturities of up to five years for now. We believe this positioning may serve the purpose of optimising risk-adjusted returns for bond investors over a 12 to 15-month horizon.

More importantly, deciding what assets to avoid may be easier to calculate in the current environment. The biggest risk in debt markets continues to be of worsening credit contagion that may lead to rising solvency risks, rating downgrades, credit spreads widening and/or liquidity drying up. In fact, no balance sheet, even of AAA-rated corporates, has been tested for the current scenario. Hence, we continue to recommend sticking to “safety and quality”. This is the segment that would continue to benefit from increased supply (liquidity) and lower cost of capital (transmission).

Actively managed portfolios, with a firm bias towards safety and quality, should continue to do well and also be able to capture some of the tactical trading opportunities that may arise during the year.


Diversification is particularly important in riding out the current market conditions while managing risk levels. Gold is known for its safe-haven characteristics. It is therefore a welcome portfolio diversifier given the extreme uncertainty seen in financial markets currently. Even when the investors return to the markets, they may remain risk averse in the short term, supporting the rare metal.

With central banks providing significant monetary support and lower real rates, the opportunity cost of holding the precious metal continues to fall. For Indian investors investing in gold onshore, there is added diversification benefit from the Indian currency’s depreciation against the US dollar, which may be inevitable now. Further, any enhanced taxation to discourage hoarding this physical asset may also support Indian rupee gold prices.


Market Perspectives April 2020

Financial market sell-offs, in the face of unprecedented policy measures to fight the effects of the Covid-19 outbreak, suggest any rebound may be a few months away.


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