As the year ended, many indices were at/or near all-time highs.
Table 1: Markets boomed as COVID-19 soared
(Source: Refinitiv Eikon, Worldometer, WHO; Global Bond ETF – I-Shares US Aggregate Bond ETF; EM Bond ETF = I-Shares Local Currency EM Bond ETF; )
2020 taught us, yet again, that it is difficult to predict short-term market movements. However, markets tend to move on particular themes. The consensus-investing theme globally seems to be on:
a) Global interest rates will remain low for long and global liquidity will remain in surplus
b) The US dollar will continue to depreciate
These two trends seen together could mean that global investors will seek higher return destinations and will try to diversify their investments to non-dollar assets. If so, this trend should be positive for local investments made in emerging economies. When seen from the geo-political angle of investors moving away from China, India being the only other large emerging Asian economy comparable in size, we seem well placed yet again as a potential recipient of these large flows.
If India is indeed able to attract such large excess inflows over the year, we expect the Indian rupee to remain strong, interest rates to remain low, liquidity to remain comfortable and equity valuations to remain high. This is not a prediction but is an ‘If so, then what’ kind of scenario analysis. It may or may not happen, however portfolio managers will bear this in mind while investing.
Low growth in earnings and slower GDP growth had led foreigners to cut their India allocation over the last 4 years. Despite recent selling by domestic investors and the relative over-valuation from an historical perspective, Indian equity markets have climbed towards all-time highs on the back of foreign flows. If these large inflows keep cost of capital low, boost demand and trigger a private capex recovery, we will see earnings estimates upgraded. The valuations then might not look as rich as they seem now.
As we saw in the post SARS era of 2003, foreign flows can come in droves and can keep valuations expensive and portfolio managers need to be prepared for such a scenario.
Speaking about the ever-shining asset- gold, investors at Quantum have long known our stance of owning 10%-20% of one’s portfolio in gold. Gold did what it was supposed to do this year and last. The fact that it went up not only in dollars but in all currencies was a testament to it being a store of value.
We have seen increased focus from global investors in adopting ESG (Environment, Social and Governance) methodologies in their investing. Quantum’s more than 5 year-long effort on developing a proprietary ESG investment process paved the way to launch of the ESG Equity Fund. The initial signs are rewarding with the fund posting significant returns since its inception in July 2019. ESG at Quantum is not only a fund offering but a philosophy and we believe globally ESG investing will get integrated in most investment portfolios.
(The author is a Fund Manager at Quantum Asset Management Company, based in Mumbai)
