When the Winning Asset Class Keeps Changing

For about 16 months from September 2024, there has been sustained volatility in the equity markets caused by penal trade tariffs, geopolitical tensions, AI-led disruptions, sharp cross-currency movements despite a reasonably healthy domestic macro situation. The main benchmark indices are still around the same levels they were a year-and-a-half ago.

Meanwhile, gold and silver prices skyrocketed, recording triple-digit returns in the past 2-3 years due to global uncertainty, demand from new-age industries, buying from Central Banks and a rush to safe-haven. Further, the debt market (gilt) has been fairly stable delivering high single digit returns in over the past few years. Thus, market leadership among asset classes rotated from time to time.

From an investor’s perspective, the best way to make the most of all market situations and to earn healthy risk-adjusted returns is to adopt a suitable asset allocation pattern.

Winners rotate

In general, the dynamics of asset classes vary according to different market conditions. Equity markets tend to do well in an economically expansionary cycle, when domestic and local macros (inflation, interest rates etc.) are sound and corporate earnings are on a robust upswing.

Debt investments tend to perform well in contractionary phases of the economy. In general, they play the role of providing stability to the portfolio with steady returns and accruals.

Gold traditionally serves as a hedge against inflation and currency depreciation. In recent years, it has also delivered strong performance due to heightened global uncertainties, reinforcing its role as a safe-haven asset.

From CY12 to CY25, equities (Nifty 50 TRI) was the best performer for seven years. Gold (MCX prices) has been an outperformer for six years, while debt (CRISIL 10-year Gilt Index) has been the best asset class for one year. This illustrates how leadership can shift across asset classes over time. Combining such uncorrelated asset classes ensures that a diversified portfolio is well positioned to deliver optimal risk-adjusted returns.

Allocation Challenges

Investors are often advised to buy at lower levels (in terms of price or valuation) and sell at higher, more expensive levels. They are also encouraged to invest in the right asset class at the right time. While these suggestions are valid in principle, they are far easier said than done. What is often observed is that in practice most of the investors frequently end up doing the exact opposite, thereby dampening their investment experience.

Data shows that during September 2017, September 2018, October 2021 and September 2024 when index PE multiples were expensive in the range of 22-27 times, DIIs inflows were positive to the tune of Rs 11,000 crore to Rs 30,000 crore. On the other hand, in September 2012, January 2013, September 2013 and March 2014, when index PE multiples were inexpensive at 15.3-16.8 times, there were DII outflows to the tune of Rs 9000 crore to Rs 17,000 crore. This clearly shows the behavioural challenge investors face.

What Can an Investor Do?

For retail investors, asset allocation can be best done via the mutual fund route. Among hybrid schemes, investors can consider the asset allocator fund of fund route for long-term wealth creation and disciplined portfolio diversification. This type of fund ensures appropriate allocation to different asset classes based on valuations calls taken via rigorous internal models and research framework. In addition, professional fund managers ensure smooth switching and rebalancing among asset classes as and when required, apart from optimising for overall taxation efficiency and portfolio stability.

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of Outlook Money. The information is for general informational purposes only and should not be construed as investment advice or a recommendation to buy, sell or hold any security, asset class or investment product. Past performance is not indicative of future returns. Investors should assess their financial goals, risk appetite and investment horizon before making investment decisions and seek professional advice where required.

Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature