Assets in portfolio should be counter-cyclical to each other: Kaustubh Gupta
ETMarkets.com
Synopsis
"Opportunities in the sense that there is a vacuum which is being created in the world order and there is a place that India can grab in it and threat in the sense that when so much of uncertainty is there, there is always a chance of accidents, whether it is on geopolitical front or it is on economical front," says Kaustubh Gupta.
Kaustubh Gupta, Co-Head – Fixed Income, ABSL AMC, says “post Covid, change has become even more pertinent, in the sense that for the first time, the uncertainties on economics, geopolitics, fiscal response and the impact of monetary policy response is paramount and which is why at least as far as the global platform is concerned, we are living in a little bit of uncertain, uncharted territory which opens both opportunities for India and threats for India.
Kaustubh Gupta: We think that we have this ability to predict the future, but we are living in a bit of an uncertain environment. So, when Dr Krugman and Larry Summers were on opposite sides last year and what actually played out in 2023 was in nobody’s radar. The global economy was expected to slip into recession because of the unprecedented rise in interest rate, but 2023 turned out to be a lot more resilient.
And the Fed has been consistently getting it wrong in the last four years, both in terms of their projections of growth and inflation, despite having hundreds of economists in their research book. Now, all these are testimony to the kind of uncertain environment that we are living in and which is why I will agree with to some extent with Dr Krugman that the macro environment in current regime is actually a little bit of untested waters and the real reason is because for the first time in the history of finance, in the post Covid world, both monetary and fiscal policies are talking to each other in the same direction, at least till middle of 2022.
Fiscal authorities have realised that it is much easier to expand, but it is very difficult to contract back. What we are seeing is what is happening on the US side of it. Their fiscal deficit is unprecedentedly in peacetime talks that growth is doing great, inflation is falling, but still their fiscal deficit is running at a closer to 6% to 7%. It is just one side of the story. The other side of the story is on China, which is what he also tried to emphasise. Chinese authorities, it seems are running out of the solution to take their economy out of the bad patch they are into.
To summarise, I would say that in the last 40 years, there has been two large drivers of policy making and macro environment. One is China, which became the producer of the world. Another is the US, which became the consumer of the world and rest all economies were really muddling through and as a pack emerging markets and developing countries they did not make so much of a difference.
Opportunities in the sense that there is a vacuum which is being created in the world order and there is a place that India can grab in it and threat in the sense that when so much of uncertainty is there, there is always a chance of accidents, whether it is on geopolitical front or it is on economical front.
Kaustubh Gupta: Yes, it is a basic question on the asset allocation part of it. Now, when you look to invest and for that matter, the general advice is that do not put all your eggs in one basket and the reason is that and the thesis of investment philosophy is that the variety in the portfolio should be in the sense that it should be counter-cyclical to each other.
In the current paradigm, I would say that when we look at our investing as an asset allocation cycle, we should look from the perspective of macro asset allocation and macro asset allocation does not mean zero and hundred. Macro asset allocation means that at all points of time, your overall asset allocations need to have a particular percentage of your overall portfolio into a variety of asset classes. Now, you can change the weightage of those asset classes depending on the macro environment that you are living in, from debt, equity, physical assets, real estates and other alternatives but you just cannot say that a particular asset class is the answer to all sorts of your problems.
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On global economy & India’s position in itKaustubh Gupta: We think that we have this ability to predict the future, but we are living in a bit of an uncertain environment. So, when Dr Krugman and Larry Summers were on opposite sides last year and what actually played out in 2023 was in nobody’s radar. The global economy was expected to slip into recession because of the unprecedented rise in interest rate, but 2023 turned out to be a lot more resilient.
And the Fed has been consistently getting it wrong in the last four years, both in terms of their projections of growth and inflation, despite having hundreds of economists in their research book. Now, all these are testimony to the kind of uncertain environment that we are living in and which is why I will agree with to some extent with Dr Krugman that the macro environment in current regime is actually a little bit of untested waters and the real reason is because for the first time in the history of finance, in the post Covid world, both monetary and fiscal policies are talking to each other in the same direction, at least till middle of 2022.
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Fiscal authorities have realised that it is much easier to expand, but it is very difficult to contract back. What we are seeing is what is happening on the US side of it. Their fiscal deficit is unprecedentedly in peacetime talks that growth is doing great, inflation is falling, but still their fiscal deficit is running at a closer to 6% to 7%. It is just one side of the story. The other side of the story is on China, which is what he also tried to emphasise. Chinese authorities, it seems are running out of the solution to take their economy out of the bad patch they are into.
To summarise, I would say that in the last 40 years, there has been two large drivers of policy making and macro environment. One is China, which became the producer of the world. Another is the US, which became the consumer of the world and rest all economies were really muddling through and as a pack emerging markets and developing countries they did not make so much of a difference.
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Now that has changed in last ten years.Post 2008, it started the change and post COVID that change has become even more pertinent, in the sense that for the first time, the uncertainties on economics, uncertainties on geopolitics, uncertainties on fiscal response, uncertainties on the impact of monetary policy response is paramount and which is why at least as far as the global platform is concerned, we are living in a little bit of uncertain, uncharted territory which opens both opportunities for India and threats for India. Stocks Recommendations
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In fact, the third accident could happen in your portfolio front as well, triggered by the points which you said and that also increases the need for having a cushion of fixed income or perhaps credit side and not go completely all out on equities alone in the portfolio, so then a good liquidity position or exposure to certain returns, fixed income, can help one glide through these uncertain times? Anything could trigger a big crash and if you are not prepared…Kaustubh Gupta: Yes, it is a basic question on the asset allocation part of it. Now, when you look to invest and for that matter, the general advice is that do not put all your eggs in one basket and the reason is that and the thesis of investment philosophy is that the variety in the portfolio should be in the sense that it should be counter-cyclical to each other.
In the current paradigm, I would say that when we look at our investing as an asset allocation cycle, we should look from the perspective of macro asset allocation and macro asset allocation does not mean zero and hundred. Macro asset allocation means that at all points of time, your overall asset allocations need to have a particular percentage of your overall portfolio into a variety of asset classes. Now, you can change the weightage of those asset classes depending on the macro environment that you are living in, from debt, equity, physical assets, real estates and other alternatives but you just cannot say that a particular asset class is the answer to all sorts of your problems.
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