The year 2020 has been a wake-up call for a balanced asset allocation plan. 

Who would have thought that after the 39% collapse from the high achieved in January 2020, the S&P Sensex would actually end the year at all-time highs, giving a YTD return of 16%. The year 2020 reinforced the notion that traditional valuation metrics may not work in a world where central banks continue to pump massive liquidity and cost of capital continues to be pushed lower. Equity markets have ignored sharp cuts in GDP growth and significant loss of jobs and income and continued to rally, driving valuations much above historically observed levels.

India, which experienced one of the largest single month outflows in March 2020 ($8 bn), ended 2020 with net inflows of $23 bn with $16 bn coming in the last two months of 2020. Local mutual funds have seen redemptions with net selling of $ 6.5 bn, as retail investors booked profits.

Market outlook

Despite the elevated valuations and sub-par economic growth, we are more optimistic today about investing in equities than we were a year earlier for the following reasons:

• Interest rates for mortgages are at a two-decade low. Coupled with lower real estate prices and reduced transaction charges, affordability is up by 15-20%. This could drive increased buying activity. Increased real estate transactions could drive consumer demand as buyers fill up homes with consumer durables, home furnishings, etc,. boosting economic activity
• Indian G-sec yields at 6% appear far more attractive than yields currently on offer in the western world (zero to negative). If oil prices remain low, the rupee may not see sharp depreciation, making Indian fixed income yields attractive to pensions in the West. India could potentially draw significant flows from this pool, which if channeled correctly can keep domestic interest rates low and act as an economic multiplier to drive consumption demand as well as infrastructure creation.

n Corporate India having experienced an economic slowdown for the last few years has been focused on driving efficiency and controlling costs. Even a small rebound in demand will drive operating leverage, resulting in profits rising at a much faster pace than revenues n Strong flows plus an improving earning cycle, will most likely ensure elevated PERs sustain.

Indian equities remain an attractive asset class and are expected to do well over the long term. Investors are advised to remain invested. Trying to time market entry and exit may backfire. SIPs remain the simplest way to tide over market cycles. The year 2020 has been a wakeup call for a balanced asset allocation plan. Investors should spread their savings across equities, debt and gold based on their long-term goals and risk and return preferences.