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A case exists for an asset allocation shift to equities

The Financial Express, Mar 14, 2017

Sanctum Wealth Management has released its Investment Outlook Report which identifies the key investment themes for this year.

Equities

The last 20-odd years, and certainly the last five, have taught us that whenever there is stress in the system and fear in the markets, it has been a good time to buy. India remains in a structural long term bull market. Earnings reports in the recent quarter have been surprisingly good and we expect earnings of Nifty companies to grow over 17% for the whole of FY18. With lower bond yields, fixed deposit rates, falling real estate and gold prices, equities are the most attractive asset class for investments with a horizon for three-plus years.

In lieu of the typical greed and fear classification, we classify equities as a high remorse asset class. Investors spend a significant amount of time in remorse over their decision to buy. The rewards are well worth it. The key to outsized returns is to maintain a longer term perspective, deploy capital during sell-offs, and not let shorter term volatility lead to bad investment decisions. The wealth creation that lies ahead will dwarf the wealth creation we have witnessed in the past decade.

Despite a painful Q4 (October to December) 2016, many stocks delivered stellar returns in 2016, while the index delivered a sub-par 3.0% return. Once the demonetisation effect wears off, a sharper than anticipated snap back could be on the cards as delayed consumption comes online. A case exists for an asset allocation shift to equities. The last time an equivalent valuation opportunity in favour of equities arose was June 2013. We remain of the view that reasonably priced growth focused strategies will deliver returns in line with investor expectations, particularly for patient investors over longer term periods.

Back to midcaps

Post demonetisation, we favoured large caps as quality names were sold off. Those have bounced back handsomely and our tilt shifts back to midcaps. The growth cycle continues and for long-term investors looking to maximise returns, midcaps should remain a core exposure. The Nifty 50 Free Float Midcap 100 index has delivered a 21.14% CAGR since 2001, versus 14.6% for the Nifty 50. That is a good enough reason for us to be always biased towards the midcap space.

Real estate

Real estate forms a major part of the net worth of most consumers. There is likely to be a negative wealth effect since the value of real estate has come down as most transactions are now being quoted in white. However, the decline in rates serves to offset this negative.

Gold

We were underweight on gold all of 2016 and see limited reasons for changing our forecast. It is worth noting that gold discoveries peaked in 2007. Discoveries of gold have collapsed since then and 2015 may end up being the peak global production year for gold. With a generally stable global economy, the impetus for owning gold remains low.

Extracts from Sanctum Wealth Management’s Investment Outlook Report 2017

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