Time to reconsider risk budgets and buckle up for the ride

02 July 2021

By Narayan Shroff, India, Director-Investments

You’ll find a short briefing below. To read the full article, please select the ‘full article’ tab.

  • Summary
    • With a fast economic recovery in sight, the road ahead is expected to be bumpy for India’s financial markets
    • A core-satellite investment approach may be worth considering – by maintaining a steady "core", but adopting higher risk strategies in the "satellite" section of your portfolio
    • We also suggest investing in high-quality equities and high-grade corporate bonds as the economic recovery enters its next phase
    • For Indian investors, the different growth rates of other major economies around the world highlight the importance of global stock market exposure.
  • Full article

    As the economic recovery evolves and inflation rears its ugly head, investors might consider rebalancing portfolios to match their risk appetite and budgets. A core/satellite approach may help portfolios to weather periods of likely turbulence ahead.

    The unprecedented monetary and fiscal support, high liquidity and structurally lower rates have supported the financial market performance in India. However, the constrained economic environment through the waves and ensuing lockdowns and the general risk aversion through this period led to more of a K-shaped recovery. Parts of the market trade at rich valuations while others struggle through the pandemic.

    With a sharp economic recovery in sight in the second half of the year, a broader bounce in each asset class may occur.

    Also, while inflationary pressures are building, in a structurally lower rates environment, investors may need to take more risk to earn long-term real returns.

    Aligned on inflation expectations

    The Reserve Bank of India (RBI) may be channelling liquidity and targeting stable interest rates across the curve that are also conducive to sustainable domestic growth. That said, financial markets are likely to remain on a tightrope depending on inflation data and inflationary expectations.

    In the near term, the market and policymakers seem to be aligned that inflation is likely to be transient and addressable through counterbalancing factors such as unemployment, stabilising pent-up demand and supply-side catch-ups.

    Time to review asset allocation

    With the recovery and run-up in Indian equities over the last year or so, it may be time to review asset allocation and rebalance as required. Also, within this allocation, it may be worth increasing the risk allocations in each asset class using a “core/satellite” strategy, with the satellite portion representing higher risk strategies.

    To mitigate the potential volatility in satellite portfolios, especially from any risk-off triggers globally or domestic headwinds, we suggest staggering allocations over coming months and maintaining appropriate portfolio diversification.

    As an example, an investor who invested at the then peak of India’s S&P BSE 500 index of listed companies on 7 January 2008, earned around 6.9% a year compound annual growth rate (CAGR) by 15 June 2021. Instead, investing at the following bottom of the market on 9 March 2009, in the aftermath of the global financial crisis, delivered around 17.5% CAGR over the same period.

    While catching the top or bottom of the market may only be possible in the hindsight, staggering investments monthly starting from the top of the market in 2008 until the bottom of it in 2009 produced a CAGR of around 12.5% over the same period.

    Active management is key

    Active management remains key for core portfolios, due to high valuations and the low margin for errors when pricing in longer projections. For satellite portfolios, the same holds with a large bottom-up universe to select from and a relatively fragile, and evolving, environment, limited visibility, early versus late cyclicals, supply-side catch-ups versus the demand-pull ones and cost pressures among other factors.

    Active management in such portfolios is advisable not just for diligence and when selecting how to allocate, but also to monitor and timely exit, rotate or book profits.

    Quality in vogue

    In Indian equities, we continue to suggest sticking to quality businesses and a resilience bias in the core portfolio. It includes companies that may thrive using their pricing power and adding to market share, even when their margins might come under pressure from:

    • Inflation/input costs (such as labour cost) pressures; and
    • Financing cost pressures (rates increase as well as spreads widening)

    These companies also tend to have a long-term, stable investor base (that is, are well placed to withstand money outflows due to general market risk-off events).

    Satellite equity portfolios might comprise of small and mid- cap portfolios and cyclicals (including the pandemic-led late-cyclical sectors like automobiles, retail, leisure, travel and tourism).

    Capex cycle

    We expect the Capex cycle to kick in faster than some forecast due to formalisation of the economy. While this process had started post demonetisation in 2016, the goods and services tax (GST) implementation in 2017 and India’s credit crisis in 2018, the pandemic seems to be accelerating it.

    The weaker and vulnerable businesses are giving way to more “organised” ones. This has led to a faster Capex cycle as these organised players need to scale up supplies quickly. Vulnerable companies’ idle capacity may not be fully acquired/utilised by stronger peers that would rather create capacity on their “cleaner” books.

    Unlisted opportunities

    Apart from the small and mid-cap opportunities in the listed universe, opportunities in the unlisted space continue to attract attention, especially in late-stage venture capital, private equity and the pre-listing market. The acceleration in the progress made by domestic technology and tech-enabled businesses during the coronavirus era is expected to keep the primary markets abuzz for years to come.

    High-grade corporate debt appeals

    In Indian debt, we continue to suggest keeping core portfolios invested in high-grade corporate bonds of up to 5-year maturities, through a mix of actively managed and roll-down strategies. The still steep rates curve seems to offer enough carry to compensate for any residual duration risk in roll-downs.

    We reiterate our stance that the RBI will support the bond markets through its policy stance, liquidity and rate stability across yield curves. With the inflation prints and higher bond supply in the market, however, portfolio volatility may remain elevated.

    Time to nibble at mid-yield, high-yield and structured credits

    With the broader economic recovery, it may be worth building a satellite fixed income portfolio across mid-yield, high-yield and structured credits. Our preference in the non-AAA segment remains towards credit/perception upgrade candidates and in sectors standing to profit from government policies and economic revival. Such sectors include roadways, infrastructure, power and select non-banking financial companies with a focus on housing finance and micro, small and medium enterprise lenders.

    Residential real estate-backed debt, by marrying high yields with appreciating collateral values, looks well positioned to profit in the transition phase. Once again, selection, diversification and monitoring remains key.

    Global exposure broadens the opportunity set

    The different growth profile of the largest economies, especially in recent quarters, highlights the importance of global equity exposure (both across public and private markets) for Indian investors.

    Besides the opportunity to participate in external markets, like US equities or Asian emerging markets, the approach can allow you to consider investing in opportunities expected to prosper from the new normal across the technology spectrum. Although not our base case in the short term, such exposures would profit from any rupee depreciation, perhaps caused by worsening inflationary risks.


Market Perspectives July 2021

Investor sentiment remains upbeat as signs of inflationary pressures grow. Our investment experts highlight our main investment themes and examine prospects for the global economy.

Related articles

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

This communication:

  • Has been prepared by Barclays Private Bank and is provided for information purposes only
  • Is not research nor a product of the Barclays Research department. Any views expressed in this communication may differ from those of the Barclays Research department
  • All opinions and estimates are given as of the date of this communication and are subject to change. Barclays Private Bank is not obliged to inform recipients of this communication of any change to such opinions or estimates
  • Is general in nature and does not take into account any specific investment objectives, financial situation or particular needs of any particular person
  • Does not constitute an offer, an invitation or a recommendation to enter into any product or service and does not constitute investment advice, solicitation to buy or sell securities and/or a personal recommendation.  Any entry into any product or service requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding documents
  • Is confidential and is for the benefit of the recipient. No part of it may be reproduced, distributed or transmitted without the prior written permission of Barclays Private Bank
  • Has not been reviewed or approved by any regulatory authority.

Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.

Barclays is a full service bank.  In the normal course of offering products and services, Barclays may act in several capacities and simultaneously, giving rise to potential conflicts of interest which may impact the performance of the products.

Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.

Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation. Law or regulation in certain countries may restrict the manner of distribution of this communication and the availability of the products and services, and persons who come into possession of this publication are required to inform themselves of and observe such restrictions.

You have sole responsibility for the management of your tax and legal affairs including making any applicable filings and payments and complying with any applicable laws and regulations. We have not and will not provide you with tax or legal advice and recommend that you obtain independent tax and legal advice tailored to your individual circumstances.