Never bet against a market driven by liquidity
Investors intuitively knew this all along. What FY21 did was to underline 2 things. Firstly, never overestimate the importance of value in the short-term. Secondly, never underestimate the power of liquidity. Over the last 14 months, global central banks infused over $10 trillion into markets. India alone infused close to $400 billion through fiscal and monetary measures. Most of this money found its way into financial assets, pushing global equity indices to record highs. Valuations may but it hardly matters in the face of liquidity.
Equity valuations gravitate towards the most adaptable
While indices across the world spurted, a subtle shift was noticeable. The rally was not about old economy steel, railroads and cement. They did gain, but that was not the story. The valuation expansion gravitated towards companies that created a niche in sectors like IT, cloud, digital technologies, new age pharma alternate energy etc. Just scan the companies that created value in the US and India and you would get it. Reliance made a fleet-footed move to digital and Tata Motors charted a future in alternate fuel cars. During the year Tesla became more valuable than all global auto stocks put together. In India, the most valuable power company by a huge margin is rookie Adani Green. That sums it up!
Bond yields matter for equity markets
As bond yields in the US shot up from 0.52% to 1.76% and Indian bond yields went up from 5.65% to 6.32%, equity markets got jittery. When debt becomes more attractive, who wants to risk money in equities. The key learning was that in a complex market scenario, factors as remote as bond yields in the US can impact Indian stock prices. It was a warning signal that India must not be lax about fiscal deficits for too long.
Gold glitters occasionally, but has its limits
The period between early-2019 and mid-2020 was the golden period for gold as an asset class. It is not often that you see gold giving 25-30% annualized returns for 6 quarters in succession. The fortunes of gold peaked in Aug-20 at a spot price of $2,065/oz and fell 18% from those levels. Gold does best when there is uncertainty in markets, not when there is growth optimism. The big learning was to limit gold to 10-15% of portfolio allocation and not to go overboard.
Debt and debt funds can be risky too
It is time to look at global assets
Over the last few years, one of the best performing asset classes has been global assets. Indian investors have access to global assets through international Fund of Funds as well as direct access. These international FOFs have given the best returns over the last 5 years compared to other asset classes. For an investor looking to diversify portfolio risk, global assets is a must-have. It added returns and reduced risk in FY21.
Asset allocation is the answer to most questions
That looks like old hat but it got emphasized during FY21. How many investors anticipated an incredible 70% rally in the Sensex in FY21? Obviously, nobody would have expected it. It would also have been impossible for you to pick the crests and troughs in the Nifty to trade. The best way would be to stick to good old asset allocation. The beauty of this approach is that as equity values go up, you automatically monetize and come back to the original allocation. As equity values decline, you automatically invest more. Forget about volatility and index prediction; FY21 taught us that if you stick to your asset allocation, you would certainly be better-off.