Here’s how multi-asset allocation can become an effective strategy for 2022


The year 2022 promises to be a year full of events. The recent hawkish stance taken by Western central banks to focus on tightening liquidity measures could change the narrative of global money flows as we enter 2022. This could be the year of a trend reversal. . Thinking back to 2021, where central banks inundated the economy with easy access to money to revive demand after the aftermath of the pandemic.

What followed thereafter was to be guessed. Cheap silver, chasing high growth, has made its way into emerging markets (in the form of FII flows) giving rise to one of the fierce market rallies of recent times. Emerging markets, including India, are currently trading at a higher valuation (thanks to relentless FII buying in 2021). Whether central banks’ shift in stance could reverse Westward FII flows is a difficult question to resolve.

Emerging markets like India are at a crossroads where high valuations coupled with easy monetary policy pullbacks from central banks around the world can trigger outflows from IFIs. This could mean that the Indian stock market could be exposed to FII exits at the dawn of 2022. But let’s look at the other side. Domestically, Indian economic growth is structurally in a good position compared to our peers.

For example, national retail participation is strong and anchored on the inherent recovery in demand, high-frequency macroeconomic data continues to surprise on the positive side, with rapid inoculation, India has handled the new variant epidemic, l The economy has gradually opened up with operational businesses, the business confidence index is at an all time high, the recent tightening in commodity prices and crude prices bodes well for the government’s budget perception. So, if India continues to maintain its GDP growth, we might see the equity market hang on to its expensive valuation.

This struggle between domestic optimism and the flight from FIIs to safety can trigger volatility in stock markets. Many experts expect the stock markets to remain very volatile in 2022. This means that time will be tested for investors who adopt a portfolio of pure or high beta stocks. So the question arises, having generated wealth in the last 18-20 months, is there a better strategy suited to the current situation?

Many other strategies can outperform the equity-focused strategy, especially at a time when the markets are characterized by a high degree of uncertainty. Multiple asset allocation could be one of those strategies that can be used at these times.

Multiple asset allocation is an investment style where investors diversify by investing in different uncorrelated asset classes, so that a sharp correction in one asset class has no impact. cascading over others. There are many forms of asset allocation combinations currently available with asset classes based on investor risk appetite, such as stocks, debt, gold, commodities, currencies. , real estate, real estate investment trusts (REITS), infrastructure investment trusts (InvIT), etc. .

The multiple asset allocation strategy is an all-weather strategy, but it has increasing relevance in the current pattern of things. The multiple asset allocation strategy can work when the markets are in a transitional mode where money is juggling different asset classes (due to uncertainties) before settling on an asset class. particular. We are not in a different situation today. While markets are expected to swing between debt and stocks due to central bank liquidity tightening, it makes sense to have a mix of stocks and debt in your portfolio.

An asset allocation strategy based on a fundamental approach could be an effective way to manage volatility. One can choose to add other items like gold and real estate depending on one’s risk appetite and knowledge. Today, mutual funds offer various asset allocation programs across different combinations of asset classes. The multiple asset allocation fund has proven to be beneficial over a longer period.
Investing is a game for the long term and you should aim to achieve a higher CAGR over the long term. The stock market last year delivered good returns and investors should aim to extend them for the long term. This can be achieved if the investor protects his wealth from erosion due to market movements. Asset allocation could be that missing piece for investors that can offer a touch of stability to their portfolio, thus supporting long-term wealth.

Asset diversification helps reduce the impact of adverse movements in the equity market as investing in other asset classes like debt, gold, etc. ensures portfolio stability. Adopting asset allocation is easier said than done. This implies having unparalleled knowledge and understanding of different asset classes. Investors with limited knowledge trying to adopt an asset allocation strategy on their own may run the risk of incurring losses if they are unable to assess the changing dynamics of the asset class. It is therefore advisable to follow the advice of the financial advisor or to invest in Dynamic Asset Allocation funds offered by various UCITS.

The author, Dinesh Pangtey, is Managing Director of LIC Mutual Fund Asset Management Ltd. The opinions expressed are personal.

First publication: STI


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