The markets have been on tenterhooks amidst the ongoing West Asia conflict. As a result of these, equity markets have seen rapid fluctuation. What’s the right investment strategy in the current scenario? Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company, in an interview with Sandeep Singh of The Indian Express, advised investors to focus on domestic sectors.
Advise investors to stay ‘Neutral’ on equity amid geopolitical uncertainty
Shah pointed out that with no sight of de-escalation in the Middle East, investors may consider domestic sectors like banking, financial services, and consumer durables, as they are not directly co-related to oil prices.
He added that during these times, investors should remain neutral on equities, noting that allocation should be in line with their risk profile and investment objectives. He said ‘equal-weight’ investors can continue with their SIPs but should avoid putting money in a lump-sum manner.
According to him, “this is the time to be Neutral with equity and not Overweight.”
Equity allocation playbook for investors
Shah suggests that investors ‘Underweight’ on equity may look to invest in a calibrated manner. “Markets are likely to remain volatile till such time that clarity emerges on the geopolitical front,” the industry expert added.
With the markets being down by 10%, Shah says that investors should follow the “dharma of asset allocation.”
Within equity, he advises investors to be slightly ‘overweight’ on large and midcaps because they will be less volatile. He also advised investors to add domestic-focused sectors which are not directly impacted by higher oil prices, such as banking and financial services and consumer durables.
Outside equity, be believes that investors can focus on debt. In debt, interest rates are likely to go up because of a higher fiscal deficit. So, in that scenario, he advises, “one can invest at the shorter end of the debt yield curve arbitrage fund, short-term bond fund, money market fund so that you don’t carry duration risk in a rising interest rate environment.”
Safe haven metals may regain shine
While the prices of Gold and Silver are currently trending down in markets, Shah says that investors may look to invest in these assets due to their safe haven demand. He added that the recent fall in gold and silver is because of the rise in interest rates.
He added that US interest rates will eventually come down, which will provide a cushion for these precious metals.
“But one should remember that there is no intrinsic value in precious metal but emotional value, so one should invest, but only a certain percentage of your portfolio,” Shah told IE in the interview.
Why this market fall is different from Covid times
Shah added that the recent fall in markets is different from one during Covid-19 as it is driven by human emotion and sentiment.
Citing examples of Iraq’s invasion of Kuwait and the Iraq War, he added that these past geopolitical tensions also led to a surge in oil prices. “In most cases in the past, it could be seen that the market bottomed out way ahead of the closure of the war,” Shah added.
The well-known market guru pointed out that the markets find a way to correct themselves, as seen in the prolonged Russia-Ukraine War. “…economy finds ways, and the market corrects and then finds a balance from where it can start to move up.”
Panic selling vs staying invested
The market expert noted that during the Covid crisis, people who panicked incurred notional losses, while those who stayed invested ended up making profits. “There will be volatility, there will be pain. The market anticipates the impact of higher oil prices on the rupee, interest rate, inflation, GDP growth, jobs, employment, and the situation of remittances from the Middle East,” Shah added.
Conclusion
Nilesh Shah, advised investors to take a calibrated view and pointed out that the market does not like uncertainty. He advised investors to stay invested.
