Don’t shuffle your portfolio amid global volatility

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There is a war going on between Russia and Ukraine. There is another war going on, which is geo-political, and for the control of natural resources. Items like oil, gas, fertilizers, wheat, etc., of which Russia and Ukraine are significant exporters, have been impacted. The US and the Euro nations have imposed sanctions on Russia. While imposition of sanctions gives them high moral ground, what gets overlooked is the boomerang effect on the country imposing it. Economies depend on each other for items of natural scarcity like crude oil/gas or for items of production efficiency. As a result, inflation is hurtling upwards all over the globe: It is 9% in the UK, 8.1% in the Euro Zone and 8.6% in the US. To combat raging inflation, central banks all over the world are hiking interest rates, except China. There is the risk of higher interest rates impacting growth next year, in countries used to low interest rates and flood of money being pumped in. 

What’s the impact on us? Our inflation is high, due to ‘imported inflation’ and high food prices. Foreign portfolio investors (FPIs) have been selling off like never before. These are challenging times, globally. Though India is not immune in an inter-connected world, we are relatively less vulnerable. The government is acting on the fiscal and administrative side by reducing excise duty on petrol and diesel and customs duty on steel and edible oil and imposing export curbs on wheat, steel, etc. The concerted efforts of the RBI on rate hikes and the government will have a soothing effect on inflation, but with a lag. Though FPIs have been selling vigorously, the domestic buying support has been a strong pivot. 

Portfolio impact

It is a volatile time for your portfolio. Going by the Nifty, the market is down approximately 10% from the peak of October 2021 till 31 May 2022. The correction is higher in mid and small cap segments. Equity markets are volatile, bond yields are going up. But, the 10% fall in the Nifty or somewhat higher in mid and small cap stocks is not a huge correction, given the history of markets. Bond yields have been moving up and returns from debt mutual funds have been muted over past year. However, in the process, the accrual level of debt funds has moved up, along with increasing interest rates. Crypto currency has crashed, but it was never a financial planning product in the first place. Keep your calm. The fundamental and structural strength of India remains intact. Our economy has shown resilience; after a de-growth of 6.6% in 2020-21, we have grown at 8.7% in 2021-22. The IMF projects that in 2022, India will be the fastest growing economy at 8.2%. 

No action needed 

If you are thinking of fine tuning your portfolio as per changing market conditions, this may not be the right time to do so, till we get some clarity on way forward. Adjusting your portfolio allocation between equity and debt and gold or any other exposure may sound good. However, in that case, you are trying to call a market level. It may sound clichéd, but your portfolio allocation should be as per your investment objectives. For equity, if you are thinking of reducing the exposure due to uncertainties, it is not the right approach as this phase, like similar earlier phases, will play out. If you want to buy more equity at lower price levels, there are doubts on global growth over the medium term, and the impact on India. In debt, the better accruals will bear fruit in future. Gold is a portfolio diversifier and not a staple asset class, hence allocation to it should be limited to 10%-15% of your portfolio. 

If the logic is to protect your portfolio in times of war, note that the intensity of the Russia-Ukraine combat has eased and other countries have not participated through their military so far. 

Joydeep Sen is a corporate trainer and author.

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