asset allocation: in a new “action-packed” year, get a good asset allocation

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As we enter the second year of this decade with high expectations, let us be proud of the resilience demonstrated, with the public, policymakers and governments coming together to tackle the challenges of the pandemic. In a brief recap of 2021, we saw a phenomenal stock market run, companies have reached high valuation and could raise significant capital in the primary market thanks to a growing appetite for risk.

While the stock markets have rebounded, the economic recovery has not been of the same order. We have witnessed a continued retardation of robust economic growth and on the contrary, we have seen rising commodity prices in general, leading to inflationary pressures.

Emerging markets, including India, saw net outflows of FII in 2021. India also saw almost 70,000 crore outflows, but this was offset by increased participation from individuals and institutions. national equity markets, in addition to government and central government support. banking policy framework.

We have also seen a gradual recovery in GST collections. In fact, the month-to-month numbers show an upward trend.

New programs such as the PLI to encourage manufacturing in India were put in place during the year to get these activities started as early as possible. The infrastructure sector has seen renewed interest thanks to government spending, benefiting many other allied sectors. We have seen a shift in consciousness with a focus on ESG to bring long term sustainability. The utility sector like electricity has also experienced a significant recovery. Many companies have seen their balance sheets improve as a result of the resumption of activities, which has resulted in improved profitability of the companies.

Most companies have reduced their reliance on debt to finance their growth. This is a significant fundamental improvement in Indian corporate balance sheets, thus improving return ratios for shareholders.

As the new year dawns, the positive developments of 2021 are expected to play a bigger role in the years to come and translate into better years to come. Despite fears of new variants of Covid and their effects, it looks like the economic recovery will be faster and we can expect a return to normal in 2022.

Severely affected sectors such as tourism and hospitality have started to recover and are expected to improve significantly over the coming year. A sustained low interest rate regime and the overall trend in reduced demand for credit has prompted the banking sector to continue offering lower interest rates to mortgage borrowers and mortgage borrowers, creating a stimulation for increased consumer demand.

We are seeing signs of increased demand for housing, which will resolve the high inventory problem that the real estate industry has been facing for some time. Thus, the sectors linked to housing and construction will benefit. We have seen an increase in employment opportunities due to turnover and resumption of delayed projects.

Finally, global demand for services and goods is expected to show a slight increase due to domestic problems in China.

All of these aspects together will see an improvement in economic activities which should further boost stock market performance and provide an environment conducive to IPOs and divestments, notably the Life Insurance Corporation of India – the largest IPO in the country – and to other PSUs. This will allow the government to raise funds and unlock the value of their investments.

These actions, combined with the continuous improvement of the GST and tax collection, should lead to tax improvement. Corporate profits are also expected to increase over the next three years.

Regarding interest rates, the central bank has started the unwinding process through open market operations which will not last long as there is enormous liquidity in the system while demand for currency is less.

Over the coming year, macroeconomic indicators such as rising inflation, current account deficit and currency volatility will have a considerable influence on the thinking and decisions of policymakers. Due to the relatively low demand for credit, the interest rate is unlikely to increase significantly. However, a movement calibrated on politics will begin to manifest itself during the current fiscal year.

If key rates are raised, this will have a marginal impact on sovereign bonds, but it also appears less likely to affect bond spreads.

To conclude, with the increased momentum, I expect 2022 to be an action-packed year with various state elections, improving economic activity, intermittent volatility and a path to normalcy.

In this context, as an investor, the key strategy remains asset allocation. Asset allocation funds such as multi-asset class, balanced advantage and flexi-cap funds meet this investor need. I also believe that the increase in spending on information technology and digital space has become a structural part of the system. Therefore, digitally oriented funds could also remain one of the targeted funds in the long term. In the area of ​​fixed income securities, one can consider remaining invested in programs lasting 1 to 2 years compared to long-term funds.

The author is Managing Director and CEO, Aditya Birla Sun Life AMC


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