Are you feeling scared due to uncertainty in the market? Instead of getting worried, focus on the right investment strategy

How to Navigate Volatility :After hitting an all-time high last month, the equity market is now in a difficult phase (uncertain share market). Volatility (NSE Volatility Index) has reached a 2-year high as investors have gone into cautious mode ahead of the Lok Sabha election results. At the same time, geopolitical tensions have increased due to the conflict between Israel and Hamas in the Middle East and the market’s hopes of a more rapid rate cut by the US Fed in the near future have been dashed. Investing is never easy, especially in times of uncertainty as your decisions can easily be influenced by negative sentiment or fear of loss. So how should an investor deal with the changing and volatile environment ahead (stock market volatility)? Vinay Joseph, Director, Head – Investment Products and Strategy, Standard Chartered Wealth, India has given detailed information about this (how to navigate volatile market).

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Stay calm, patient and don’t panic sell

Investors need to understand that equity markets experience volatility from time to time, i.e. it is a normal phenomenon. Market history shows that it is very difficult to predict market sell-offs and thus timing your exit and entry is challenging. In uncertain times, investors face significant COMO (cost of missing out) for holding their investments. A simple analysis of the Nifty index over the last 24 years shows that if an investor had held equity investments, he would have earned 12 per cent annual returns. If he missed 10 of the best trading days, his return would have fallen to 8 per cent and if he missed 30 of the best trading days, his return would have been just 4 per cent annually. Moreover, the best days are followed by the worst days in equity markets – analysis shows that 9 of the best 10 trading days occurred within just 2 weeks of the worst 10 days.

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Investing in a diversified portfolio

The right strategy is to invest in a well-diversified portfolio that is allocated across different asset classes. Each asset class has different characteristics and performs differently under different market conditions. Hence, a diversified portfolio is important to deal with uncertain environments. Analysis of different growth-inflation regimes shows that the risk-adjusted returns of a diversified portfolio (i.e. allocation across equities, bonds, gold and cash) exceed those of a simple 60/40 stock-bond portfolio. A diversified portfolio ensures that an investor can do this.

Ø Play the upside with equities: If the economic conditions remain resilient, investors need to maintain allocation to equities to gain faster returns.

Ø Steady source of income through bonds: Bonds can act as a hedge against domestic recession risk and provide a steady source of income to the portfolio.

Ø Gold is a good asset for all seasons: Gold has given positive returns in different growth-inflation scenarios. When growth slows down and inflation is rising, gold performs better. Apart from this, allocation of gold in the portfolio will be a good hedge against the risk of persistent inflation.

Ø Keep a cash reserve with you: If you have cash, you can take full advantage of it by investing in any sector or asset class when you get a chance. You can also use cash to take advantage of short term pullback in the market.

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Alert to India’s long term positive structural economy

Uncertainty around near-term events that may exacerbate short-term volatility should not distract investors from the long-term picture, which remains positive. The Indian economy is likely to make a successful transition to the upper middle-income group within the next two decades, as a larger and younger population boosts productivity, attracts investment and ensures more stable long-term economic growth. Moreover, India is well-positioned to benefit from shifts in global supply chains and reap the benefits of decade-long investments in digital infrastructure.

India’s macroeconomic backdrop positions Indian financial market assets to perform strongly over the multi-year horizon. Given high economic growth, well-managed inflation and strong external parameters, equities are best placed to benefit from a sustainable corporate profit cycle. Fixed income will continue to provide stable yields given investment-led growth and controlled inflation. Stable inflation and currency outlook are additional factors of support.

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What to do to boost risk adjusted returns

Investors can buffer their long-term equity and bond allocations with tactical allocations to improve overall portfolio performance. Within equities, we see value in manufacturing and infrastructure, with multi-year structural drivers for these sectors. Our focus is on balancing risk and reward through a defensive overlay through an overweight on domestic cyclicals such as industrials and consumer discretionary, overweight on healthcare. Within bonds, we see attractive risk-reward in corporate bonds, especially high quality (AAA rating), given their cyclically high yields (on government bonds) and low sensitivity to interest rate changes.