Take exposure to foreign index funds

The challenges ahead for the new government are formidable. India is suffering from degradation of its data-collection systems, which makes many macro-economic variables suspect. We don’t know what Gross Domestic Product (GDP) is, and of course, we can’t tell what the growth rate is, either. We have strong evidence of rising unemployment but we don’t have reliable government statistics. There is widespread evidence of farm distress as well. 

The Fiscal Deficit (FD) has far exceeded the targeted 3.4 per cent in 2018-19 but we can’t tell what the FD is, in terms of GDP. Tax collections have been well below target. The Goods and Services Tax (GST) has also led to unending complaints, from exporters, in particular. 

The Current Account Deficit has risen, despite a pick-up in exports. Corporate profits are down across most sectors. Banks still seem to be suffering from high non-performing assets (NPAs) and the debt crisis has infected non-banking financial companies (NBFCs). Power sector dues have risen again in 2018-19, after UDAY seemed to make a positive difference. Many important infra projects are stalled. The Insolvency and Bankruptcy Code (IBC) process has run into roadblocks. Even government employees have complained about salaries being delayed. 

All these are things that only sensible government policy-making can help to fix. It’s an open question if the government will do what it takes to tackle these. One thing this government will do, for sure. It will put some money into the rural economy, be it through new schemes, or higher MNREGA allocations, or higher Minimum Support Prices. We’ll see a rebound in private consumption demand only as and when, consumers feel more comfortable about spending. That in turn, could come about, if there is less rural distress. Private corporate investment will be dependent on a pick-up in consumer demand, which leads private enterprise to look at capacity expansion. 

The stock market has been hitting highs, in what could be termed a relief rally as continuity was assured. However, there has also been selling at higher levels despite the euphoria. The reason for that is simple. All the major stock indices are trading at price-to-earnings (PE) valuations, which are maintained only around 10 per cent of the time.  Hence prudent investors have booked some profits.  

Indeed, the market fell even as the BJP’s majority became assured. If there’s a negative trigger, the market could fall a very long way. Such a negative trigger could come from abroad. There’s the ongoing US-China Trade War, or from the US-Iran faceoff, or from Brexit-related issues, to name just three overseas situations that may affect global growth while being completely outside the Indian government’s control. 

The smart investor will be braced for such events. There are a few calls that we can make. Apart from hedges like gold, the investor should be highly-focussed on consumer-facing businesses, which have low debt. That essentially means going overweight on fast-moving consumer goods, along with a few stocks that have high rural exposure (two–wheelers, agro-chemicals). The investor should be prepared to average down as and when share prices fall in these sectors. 

The investor should, at the same time, be prepared to reduce exposure to highly-indebted companies, if there are any signs of further trouble. This means tracking the issue of debt against pledged shares, the issue of debentures in unlisted group companies and other such signs of financial engineering. 

There is one other call that it seems reasonable to make. The rupee is likely to suffer further volatility due to the global situation. If crude prices rise, the rupee will fall. If the CAD rises much more, (this is of course, likely to have a link to crude), the rupee will fall. If foreign portfolio investors pull out, the rupee will fall. The rupee may also fall if the Reserve Bank of India cuts rates, simply because the differential with dollar yields will reduce. 

A falling rupee could boost exports, even if global growth is slow. Accelerating GST processes for exporters will also help to generate some activity on this front. So there’s a case for looking at exports. 

Another way to hedge a falling rupee is to take greater exposure to hard-currency assets. It’s possible to move up to $250,000 into overseas assets annually and the processes for doing this have smoothened out. Taking exposure to dollar-denominated overseas index funds might make sense, purely because of future rupee depreciation.

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