Navigating Volatile Markets While Leveraging A Strong Economy Via Asset Class Diversification

Equity markets, too, have been on a roll in recent years. But on the valuation front, they are quite expensive, necessitating caution from investors. The Nifty 100 trades at 22.7 price earnings multiple (PE) and 4.1 times price to book (PB). Considering the data from NSE as of April 30, the Nifty Midcap 150 (PE:35.5 and PB: 4.85) and Nifty Small Cap 250 (PE:29 and PB: 4.1), it becomes clear that the valuation multiples are expensive. In fact, the market capitalization (BSE listed companies) to GDP ratio is 1.3 for FY24. 

Although long-term prospects may still be attractive, elements such as high interest rates, geopolitical tensions, domestic election outcomes, oil prices and global economic trajectory may weigh on markets in the near term. Further, The US Federal Reserve has indicated interest rates to be ‘higher for longer,’ as has the RBI. This stance has the potential to impact corporate profitability going forward. 

Structurally well-placed 

India has one of the youngest populations in the world with a median age of just 28 years currently. An EY report states that India’s working age to total population will hit 68.9% by 2030 translating to a staggering 104 crore persons. 

India’s per capita income is set to double to $5000 levels by 2030, which would unleash a flood of consumption spending. The country is set to have 100 million affluent people by 2027, according to Goldman Sachs. 

The sound consumption story, backed by government thrust on infrastructure and manufacturing would result in several sectors being beneficiaries.  Taken along with the shift to urbanization and digitization, real estate, organized retail, ecommerce, automobiles, construction, healthcare, consumer durables, contract manufacturing, banks, power utilities, electronics, capital goods, industrials, wealth management etc. are likely to do well.  

Thus, it becomes imperative for investors to understand how to navigate volatile markets in the backdrop of a thriving domestic economy. Historical data has time and again shown that asset class diversification is the optimal route to tide over volatile times.  

Asset diversification and risk-adjusted returns 

In the current environment, portfolio diversification by investing in different asset classes can help mitigate risks. Stocks, bonds and commodities can be combined to build a diversified portfolio based on an investor’s risk appetite.  

Each of these asset classes – equity, debt and commodities - have low or negative correlation between them and hence can make for great ingredients to a diversified portfolio. 

Investors can diversify by taking exposure to equity and debt mutual funds, as well as gold ETFs (exchange traded funds) through different funds. Alternatively, they can invest in balanced advantage category fund that juggle equity and debt deftly, or multi-asset funds that give exposure to three or more asset classes via a single scheme. 

Hybrid funds such as these take into account macroeconomic factors, market valuations and geopolitical aspects before deciding the asset mix in their portfolios. Thus, they make market timing less relevant and enable both lump-sum and SIP investments.