Scope for volatility high, follow dynamic asset allocation approach: Expert

Asset allocation schemes best placed for investors to benefit from current market volatility

The Indian equity market has been under pressure off late with the rampant spread of the coronavirus across the country. Given that this is an evolving situation, the near-term equity market sentiment remains weak. Since we went through a similar situation last year, we believe both the corporate houses and investors are better prepared to face the challenges that could possibly come our way. In some time, we expect to see more focus on vaccination numbers than rising cases as witnessed in the developed world.
 
Once the pandemic is under control, the recovery should again start gathering momentum. We believe there will be a period of cyclical economic recovery as the US Federal Reserve’s accommodative stance is likely to continue for the foreseeable future. But this is unlikely to last long. The real risk to the market, apart from the pandemic-induced challenges, will emerge when the US Fed turns hawkish or raises rates or rolls back quantitative easing. Any of these developments has the potential to bring down US and global markets significantly. Since we are living in a globalised world, what matters to equity markets is not just local conditions but also global conditions. Therefore, Indian markets too will face a correction as and when this plays out. So, essentially from here on, the room for volatility is high and it is our belief that the only way an investor can address this risk is by following a dynamic asset allocation approach.

 
In terms of macros, a slight spike in inflation should not be worrisome. Historically, a manageable level of inflation has led to more economic activity and businesses have managed to sell goods faster at such times. The recent example for this is the uptick in real estate sales. So, inflation should not be seen as a negative for transactions or for advancement of transactions.
 
Among the sectors, we are positive on select banks, power, telecom, software, and metals. We believe, information technology (IT) is one of the few sectors that got drastically re-rated over the last one year. The question now is how much of it is already built into the prevailing stock prices. Further, we believe there is room for commodity companies to perform well. Our belief stems from the fact that if there is a long period of under investment in any commodity, a surge in price is likely. At this point, there has hardly been any big investment coming out of any commodity related industry.
 
Investors looking to take exposure to equities can consider doing so through systematic investment plans (SIPs) with a long-term (10-year) investment horizon. Those with an investment horizon lesser than 5 years should consider hybrid schemes such as asset allocation or balanced advantage category schemes. These are well placed to take advantage of market volatility and based on the changing market conditions, fund managers have the flexibility to move assets between equity and debt, based on their relative attractiveness.
 
 The author is ED & CIO, ICICI Prudential AMC