Gold should not be more than 5% of your portfolio

Gold has been moving up and from US$ 1,340 onwards, we have been suggesting exposure of not more than 5 percent of the portfolio to gold.

The relative strength of the US dollar, fear of a global slowdown, probability of lower American interest rates and the bruising trade war between China and the US are the among the reasons that are giving gold the edge, Dr Joseph Thomas, Head of Research, Emkay Wealth Management, said in an interview to Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q) As fears of recession loom on global as well as domestic equities, is growing the biggest worry for investors?

A) The fundamental reason for the bearishness is the lack of growth or rather falling GDP numbers. Earnings growth is a function of GDP growth and there is a high likelihood that earnings may remain muted till growth revives and pick up.

The consumption and capital expenditure is sluggish, which led to weak aggregate demand. Only if the government spends and puts purchasing power in the hands of the people growth is unlikely to see a reversal or a rebound.

Stimulus measures from the government and the continuity of the accommodative stance by the Reserve Bank of India (RBI), with the transmission of the rate cuts into lower rates for businesses and retail borrowers will go a long way in restoring sentiment and boosting demand.

Q) What is your call on the currency in the near-term?

A) The fear of a global recession and the prolonged trade and tariff war between the US and China has led to a great amount of risk averseness among investors.

This what has led to selling in emerging markets and it has been quite marked in the eastern markets too. The unrest in Hong Kong is also a sleeping volcano and its consequences may be felt as the issues start escalating and assume international attention.

All these factors have resulted in weak markets and even weaker currencies. The yuan has depreciated against the US dollar beyond the 7.00 level.

We see the dollar gradually strengthening and the other currencies weakening in the next two-three months. The rupee is no exception and amid selling by foreign investors, the currency may remain weak and could trade lower around Rs 72/USD.

Q) The whole world is talking about a recession, but can we classify this as a recession or is it a cyclical slowdown?

A) It is true that what we are facing today is a slowdown in economic activity marked by low investments, output, and employment.

If the slowdown is not combatted effectively over a period of time through appropriate fiscal and monetary policies and suitable instruments, the slowdown could gradually convert itself into a full-fledged recession.

That is why monetary and fiscal authorities take cognisance of such events and initiate appropriate measures. The US economy is still growing at a decent rate but the Fed cut rates and termed it an “insurance cut” as it is a pre-emptive cut to prevent economic growth from falling.

Therefore, we expect the government and the RBI to take measures by which the economic growth is back on track.

The finance minister announced various measures in her last press meet to stimulate the economy including the rollback of the tax on overseas investors, some measures to provide more refinance to housing finance companies, etc.

There is a need for strong measures to create and scaffold aggregate demand in the economy, and that is what the economy is expecting from the government.

Q) Any sector(s) that can turn out to be the dark horse in the next two-three years?

A) Three sectors that hold excellent prospects are banking, technology and consumption themes. These are the sectors which have a deeper connection and causation with the growth and expansion of the economy.

History suggests that they tend to benefit as the economic curve turns upwards after a protracted fall and sluggishness.

That is why as the market becomes cheaper on account of a number of factors, it may be the time to start building a portfolio in a phased manner.

Q) What should be the strategy of investors? Is this the time to increase the share of fixed income or gold in the portfolio?

A) This is not the time to increase the share of fixed income in your portfolio, as the yields have already moved down to low levels, both at the short-end and long-end of the curve.

From an investment perspective, short to medium maturity plans could be the preferred segment of the yield curve. The focus towards the swift transmission of policy rate cuts into bank lending rates would be beneficial for the short-end bonds as this would lead to liquidity being retained in the market at surplus levels.

At the shorter end of the curve, investments should be maintained in high-credit quality portfolios. The longer end of the curve, too, may potentially benefit from the rate cuts and high yield spread vis-à-vis policy rates, but the increased g-sec supply-led concerns may lead to heightened volatility.

The preferred product categories would be money market funds, banking and PSU funds and corporate bond funds.

The 10-year benchmark may advance at best to 6.10%-6.20% levels, but the propensity to move towards 6.60 percent, and thereafter to 6.90 percent, is still intact. Therefore, any investment initiated may be made at the short end of the curve.

Yes, gold has been moving up and from US$ 1,340 onwards, we have been suggesting exposure of not more than 5 percent of the portfolio to gold.

The current move in gold has the potential to go back to the highs seen last time during the 2006-07 recession. What is actually giving gold the edge is the relative strength of the US dollar, the fears of a global slowdown, the probability of lower US interest rates, and the continuing trade and tariff war between China and the US, etc.

But, the exposure of portfolios to gold should be delimited to a small percentage of the total exposure and not more. Once economic growth starts picking up, gold will gradually start losing the sheen.

Q) Many experts advise investors not to catch the falling knife, but won’t they miss out on an opportunity to create wealth? What should be the criteria for buying such stocks?

A) You may catch a falling knife but you should be doubly sure that both sides of the knife are not equally sharp. It hurts only if both sides are sharp, and if only one side is sharp then you will be able to catch it comfortably with your experience.

So, it is the topology of the knife that is important. It is important to follow the market, identify where value as well as growth lies, and pick and choose investments selectively.

In a scenario of falling markets, during which time things become cheaper and cheaper still with each passing day, one needs to be more careful because everything would look the same and equally attractive.

It makes immense sense investing into managed funds, either from the mutual fund space or the PMS space. The better avenue among managed funds is the smart beta funds which combine the benefits of active management while avoiding the pitfalls of a passive approach.

Passive approach seldom gives alpha whereas smart beta strategies are designed to generate significant alpha.

Q) The Nifty is down more than 5% since the budget day and the small and midcap indices are virtually in a bear market. “The stock market is filled with individuals who know the price of everything, but the value of nothing.” Does Phillip Fisher’s quote fit the scenario?

A) I do not entirely subscribe to what Fisher said but definitely acknowledge the message that is embedded in that line. The market is generally and most of the time rational, and this rationality can be realised only over longer periods of time in the life of the markets.

But, in our investment behaviour, we sometimes display irrationality in ignoring the value for what is cheaper in pure arithmetical terms.

But, that is how the markets are and will continue to be.

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