Change in Asset Allocation (Nov24)
Review of Asset Allocation
Writing here after a gap of 1.5 years, as there hadn’t been any changes in asset allocation during this time.
Here is a review on my last Asset Allocation call (you can see on my Substack page - April 23’s). i got a few things right. Many things wrong.
What I Got Right
US Tech Exposure turned out to be Gold Mine: The decision to go long on US tech in Jan 2023 proved exceptionally good, delivering nearly 100% returns—an absolute goldmine move in hindsight.
Local Bonds performance was Okay: Short-term bond funds delivered solid returns, while long bonds rallied sharply—decent job there.
Sector Calls (Banking & IT) were decent too: Both the relative overweight (OW) positions in banking and IT sectors were spot on. Good performance in both.
Profit Growth Forecast was correct: Asserted that profit growth would no longer be a headwind from FY24 onward—correctly called, with earnings now 25-30% higher.
“Nifty underperformance will stop” call was decent: Predicted Nifty’s end to underperformance in April 2023, which played out well until recently. Thought the u/p has opened up recently again.
New Tax Regime Impact was prescient: Predicted the adverse effect of the new tax regime on fixed-income flows, particularly debt mutual funds—absolutely on the mark. i had told my many fixed income friends then - the AUM of fixed income funds would not even grow at coupon rate over next decade. Still think the same.
What I Got Wrong
UST Performance: The rally in US Treasuries (USTs) was strong initially but reversed sharply in the past two months. But point to point - a bad call.
Crude Prices: Misjudged the softness in crude, underestimating the impact of higher US supply. Consequently, India’s CAD outcome turned out much better than anticipated.
Indian SMIDs performance: The relative outperformance of Indian small and mid-caps was a BIG MISS in this cycle. Not because they o/p my expectation on profit. But because local flows chased them a lot more than what i had thought.
What shud you do now?
US Exposure: Trump’s protectionist policies, including tariffs, add to the uncertainty. His victory is too comprehensive for my comfort. Markets are too expensive. Real rates at 2% are too high. I advise a significant underweight US equities now. Won’t be surprised if we get zero returns over next 12-18 months. Swap your US equity into 10 year USTs.
India Bonds: India’s economic slowdown is likely to persist until 2025.Expect the RBI to cut rates by 100bps over the next 12–15 months. Major bond rallies could unfold in the coming years. Return to 6% on 10 year bond. May be even lower? In what time frame - 2-3 years? But i think bonds will out deliver equities over next 2 years.
India Equities: Earnings growth juggernaut is stalling in India. Most people don’t realise that Indian markets haven’t delivered well in last 3 years. Just 2-3% risk premium over bonds. This is despite a Mahan Macro (low CAD, decent inflation, rapid credit growth, Modi 3.0), decent earnings growth and buoyant local flows. One important leg of it (earnings) is showing weakness. This means further trimming of India equities. In favor of long bonds.
Final Note
I may not write here frequently, but I’ll always update when there is a big asset allocation change.
For those who prefer more frequent Gyan, I write extensively elsewhere. However, if you're just interested in just kar kya rahe ho? - this is the place to watch.
PS
Over the past few years - financial services (Banks, NBFCs, wealth outfits) have seen a significant capacity build out.. Something similar to what we saw in 2020-21 in IT. Lots of hiring and major salary hikes.
I think salary stagnation and major layoffs ahead in this segment. Similar to IT sector in 2022-24.
So my advise to friends in this sector - Go slow :)