We are going through unprecedented times of uncertainty and this is not just limited to the investment world. The fact that every aspect of life is going through an undocumented transformation has been well accepted now. Investors throughout the world have been facing a typical dilemma.
Even as global markets were reeling under pressure of depressed economic growth, the pandemic struck and turned things worse. A lockdown imposed to curb the spread of the virus has brought economic activity to a standstill with no clear indication on what lies ahead. This has obviously had a deep impact on the psyche of investors, and, more so, on the risk-averse investors who play the defensive lot.
Times like these trigger a rethinking in the entire investment philosophy of cautious investors, who want to stay away from risky assets at least till things begin to settle down. Equities have taken the worst hits among various asset classes with the global indices reeling under tremendous volatility.
The added pressure of shaky geopolitical developments between the US and China has triggered a flight of capital from risk assets to safe havens. The rise in bullion prices, for instance, is a case in point. The rise of precious metals over the recent past bears testimony to investors’ preferences in the current situation.
For those who have a slightly better understanding and are resilient to risks, a measured approach to investing in equities and related asset classes will have to be the norm. A top-down approach led by sectors that are likely to be in demand during the course of the pandemic and, thereafter, will decide the alpha generation of portfolios.
Right now, manufacturing as a sector seems to be under tremendous pressure, given the conditional approach to opening up operations for companies. A strict following of the social distancing norms, a calibrated approach to marketing and an overall lower demand will impact manufacturing companies in the times to come.
On the other hand, tech-driven companies have been scaling up their presence in a physical contactless world. Companies from the tech side, particularly in fintech, edtech and pharma segments, have been introducing many innovative platforms to help companies get over the pandemic-driven operational worries.
These will be some of the opportunities for cautious investors where the opportunity of returns comes with some clarity compared with traditional equity investments.
Considering the geopolitical developments, another factor that can drive cautious investors will be the demand for products of companies and the possibility of absorbing the supply side. Sectors like FMCG and pharma, which have a ready market on the domestic front, will surely be good bets for safer returns. On the other hand, selective stocks in the services sectors like IT and ITES, which have seen many roadblocks and have been facing headwinds from client shores, will do well. One needs to be cautious here.
Companies with a stable cash flows, and stronger balance sheets where the debt is at a minimal will be preferable. Investors will do good to trace those investment ideas where the balance sheets are stronger and can absorb shocks induced by black swan events like the current pandemic. Debt-free companies or at least those making attempts to reduce the overall debt by recasting their balance sheets will be better investment options for the cautious investor.
As ever, mutual funds can be a good route for investors who cannot devote time to study stocks in detail themselves. Overall, there seems to be a need to recast portfolios to include more risk-averse options and alternative investments rather than enter direct equities and other risky assets. The next two quarters will be key to determining the returns that this year’s investments will fetch.
(Waqar Naqvi is CEO of Taurus Mutual Fund. Views are his own)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)