Did you find the headline confusing? Don’t worry, everybody is confused about it. The term floccinaucinihilipilification, which means estimating something at little value, was used by a member of the Monetary Policy Committee of the Reserve Bank of India (RBI) during the policy review on 7 August 2019, in the context of estimation of economic growth. The word sounds like it was imported from the moon, and that is exactly what is happening.
Yes, there are some issues. Growth rate and investments are slowing. But to look at the structure of the Indian economy, it is a large economy, mostly domestic (i.e. exports are relevant but not a make or break factor) and mostly consumption driven. In contrast, China is more investment driven. The other large economies, being already developed, do not grow at the pace of China or India. If we talk of incremental global GDP growth i.e. additional goods and services produced by the world per year as compared to the previous year, India ranks third behind China and the US. We are going through a challenging phase: the world is apprehending recession, and if that happens, it will impact us as well. There are domestic issues as well. The clamour is getting loud for a government bailout package for the industry, and not just a small booster doze for the feel-good-factor.
To put in perspective, whatever the private sector industry has achieved in the 72 years since Independence is in spite of the government and not by virtue of the government. The licence-permit era of earlier years has improved to the enabling regime of today, but the buck stops there. With or without the government’s booster doze, the industry will find its way out. Only that it will take that many more years for corporate earnings growth to happen, which we have been waiting for already for many years now. Even if there is global recession and there are a few islands of growth still afloat, India will be one of them, given the growth-oriented structure of the economy. Even amid the prevailing negativity, the annual GDP growth is 6.8% (2018-19), the quarterly growth rate is 5% in the April-June period, and is expected to pick up from now on. On the other hand, other major economies are trying to achieve a 2% GDP growth rate.
What does this mean for your portfolio of investments? Your investment portfolio should be for the long haul, to ride over the cycles of economy and markets. Growth will not be secular like a defined upward trend. There has been a price correction in the market, apart from a few large-cap stocks holding up the market indices. In case you are looking to exit now, you would be doing so at the wrong time. Rather, if there is a further correction in the market, it is that much better time to deploy more with a long-term perspective. For diversification of risk, your portfolio should be allocated to various categories of assets: equity, fixed income and alternates like gold, real estate and commodities. Ideally, your portfolio allocation to various asset classes should be decided by your risk appetite, investment horizon, investment objectives and not the current market level.
In view of the potential risk of recession and/or market correction, for fresh allocations, you may allocate relatively lower to equity and that much higher to fixed income, and review later to increase your equity allocation. But it is important to continue executing the systematic investment plans (SIPs) contracted earlier. The whole purpose of the SIP route is to take advantage of lower price levels. SIP is an efficient route to enter fixed income as well; it is just a perception that SIP is meant for equity. The other asset gaining ground now, in view of geopolitical tensions, is gold. In times of uncertainty, gold acts as the safe haven, and the trade war between the US and China is the trigger. However, gold per se is a non-productive asset, unlike equity where there is a company producing value. Real estate is not set for a boom in India, at least in the immediate future, due to regularization through demonetization, Real Estate Regulatory Authority and so on. The sector is likely to witness gradual growth over the medium to long term.
To summarize, you may fine tune your allocation to financial assets i.e. equity and fixed income, to suit your requirements and the potential risk of growth slowdown and market correction. History shows that as long as you stay invested in difficult times and, if possible, invest more in phases of correction, you gain that much more in the long haul. To the extent that you want relatively lower volatility in your portfolio, resort to fixed income instruments.