- Investors can incorporate three Ds: Demystification, Directives and Diversification as ‘understanding, planning and execution’ phases for planning their investments during the current turbulent scenario.
- The understanding about key aspects such as interconnection of capital and economic space, the impact of past crises on stock markets and criticality of international trade to different industries can assist in developing insight for future investment planning.
- Amidst the current scenario, the ongoing trends both at the macro and micro level should be studied for analysing the impact on the stock markets.
- While diversification altogether reduces inherent risk to the portfolio, the budget and time constraints can be significant impediments to it.
Against the backdrop of increasing COVID-19 infection cases, the capital market stability has gone into a tailspin, observable writ large across different indices. The pandemic has triggered a chain reaction across multiple facets of the market, while investors’ enthusiasm seems to be at a tug of war with market optimism that has shown mixed signs amidst the reopening of economic activities.
As everyone seems to be sailing on the same boat, vexed by the current unemployment predicaments and unnerving challenges hurled by the economic downturn, riding out the storm via right investment moves takes more than merely trusting your gut instincts.
As it turns out, modus operandi for critical times’ investments fuse multiple X-factors (or here the 3 Ds) for weathering the crisis. ‘Demystification, Directives and Diversification’ seemingly echoing the ‘understanding, planning and execution’ phases, respectively can be the nuts and bolts for laying the ground for robust investment strategies.
Demystification involves developing the right understanding of different driving factors that could implicitly impact the capital markets, consequently having a spill-over effect on the investment and returns. Meanwhile, Directives of the market and the respective trends assessment can be built upon leveraging the fundamental understanding for developing the right set of strategies in an informed manner. Furthermore, in the ongoing highly volatile scenario, the renowned portfolio diversification can be the execution step for de-risking the investments.
Let us deep dive into the three fundamental approaches that can be the panacea for investment dilemmas in the current situation.
Demystifying Varying Aspects
Interdependency of different elements
Equity market performance and investment returns depend on many factors ranging from macroeconomic fundamentals and Government and Monetary policies, to ongoing market sentiments and industry-specific and company-centric details. Significantly, most of the aspects are intertwined.
Capital Asset Pricing Model, classifying risks as systematic and unsystematic, gives an essence of how the general perils and specific risks may impact the rate of investment returns as well as the probability of losses. Furthermore, dividend returns also have significant dependencies on the extent of market volatility, company’s growth outlook and the recent performance.
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Extent of impact from the past crises
The near-term exclusivity of current pandemic scenario seems to be challenging for gauging the level of downturn and predicting further prospects. Nevertheless, past crises can serve as a barometer for understanding the degree of damage that could be inflicted upon different industries, comparing capital market performance, and analysing the time for markets to rebound.
Ripple Effect from International Market
The globalised trade scenario and its relevance to both the businesses and economic performance cannot be discounted. The current border restrictions and ongoing pandemic scenario has brought many sectors on their knees, as they brace against the supply and demand challenges. Meanwhile, the prevailing situation and stance of the strong global trade allies such as the United States and China can be studied for evaluating the probable repercussion and fallouts in your investment model.
Gauging Directives of the Market
Trends across the Economic Scenario
Macroeconomic factors have an apparent influence on the performance of equity market and different sectors. The pandemic-induced recession and the growing unemployment rate indicate burgeoning risks for the businesses and investors. The cancellations or postponement of dividends amidst capital raising plans indicate the volatility of the investments in the current distressed economic scenario.
Meanwhile, the Government’s stance for the continuation of fiscal package and the central banks adopting low-interest rate policy pinpoint their impetus for promoting spending. Furthermore, the consumer confidence, in general, appears to be returning post the recovery with the increase in retail sales.
Evaluation of similar critical trends can help plan the investment priorities, in terms of evading the risks viz-a-viz chasing the returns.
Recent Sectoral Performance
Diverse sectors have responded differently to the pandemic depending upon the disruptive trends, changing consumer needs, and adaptation to new norms. While the travel and hospitality sectors have been facing headwinds with the social distancing norms and border restrictions, technological adoptions have grown many folds. Meanwhile, iron ore industry which came to standing in the initial months of 2020 is blooming with the skyrocketing steel production in China. While, the healthcare sector continues to be in the spotlight amidst grave health crisis.
The trends can be analysed across different sectors for analysing the overall growth prospects for the related stocks while taking exposure to attractive themes.
Performance of the Commodity Market
The high market volatility has coerced the investors rushing for investments in the safe haven, as gold prices are consistently smashing new records. Furthermore, Tesla unveiling its Electric Vehicle plans has starkly driven the popularity of the battery commodities that tend to witness growing interest of the investors.
The evaluation of commodity market and the budding lucrativeness of different associated metals can assist in taking prudent position in commodities or related companies.
Embarking on Diversification
Investment Value as per the Risk-Appetite
The value of investments should be set as per the personal income, ability to tolerate risk and the investment priorities of individuals. The incorporation of distinct equities, however, can demand significant investment along with substantial time for asset management. The high cost of diversification should be considered prior to undertaking the decision. Furthermore, owing to the time and budget constraints, investors can also opt for investment in mutual funds, which is often considered an inexpensive way for diversification via small fee for active asset management.
Balancing Growth, Value, and Income Strategic Approaches
The diversification can involve both the growth stocks as well as the blue-chip stocks, allowing the investors to capitalise on the growth prospects, while also enjoying a substantial degree of shield against risks. Investors can also tap undervalued stocks in attractive sectors to reap returns once the share prices shoot up.
Incorporating dividend stocks to the diversified portfolio via studying dividend yields and sustainability of payouts can also add a regular stream of income along with value appreciation. Besides, investment into different asset classes such as equities, bonds, commodities, and exchange-traded funds can also be undertaken as per one’s priority and budget.