Asset Allocation for Investors Pre COVID & Post COVID

1
Asset Allocation for Investors Pre COVID Post
COVID Should it Change or should I stick to one
that I am following
Speaker Chirag Mehta, Senior Fund Manager,
Alternative Investments May 7, 2021
2
Covid-19 Second Wave or Tsunami
3
As cases surged in Wave 2, Europe Increased
Testing over 7 months India in month 3, needs
more Testing
3,000,000 2,500,000 2,000,000 1,500,000 1,
000,000 500,000 -
2,150,991
1,094,007
930,340
740,747
334,950
203,608
190,092
189,411
142,820
117,763
India
France
Italy
Switzerland
UK
Day 1 of Second Wave As of Date (April
2021) Note We have considered Day 1 of second
wave for European Nations as 01st Oct 2021 and
for India as 01st Feb 2021 Source
www.ourworldindata.org
4
Fewer test may result in lower Total Cases /
Million
90,000
81,216
80,000
74,701
70,000
65,852
65,187
60,000 50,000 40,000 30,000 20,000
12,290
9,082
7,802
6,817
6,220
10,000
5,250
-
India
France
Italy
Switzerland
UK
Day 1 of Second Wave
As of Date (April 2021)
Note We have considered Day 1 of second wave for
European Nations as 01st Oct 2021 and for India
as 01st Feb 2021 Source www.ourworldindata.org
5
Lower cases reported will see lower Total Deaths
/ Million due to COVID
2,500
1,983
2,000
1,881
1,523
1,500
1,223
1,000
623
594
470
500
240
146
112
-
India
France
Italy
Switzerland
UK
Day 1 of Second Wave As of Date (April
2021) Note We have considered Day 1 of second
wave for European Nations as 01st Oct 2021 and
for India as 01st Feb 2021 Source
www.ourworldindata.org
6
Vaccine Rollout A Slow Start
7
FIXED INCOME
8
RBI has been one of the Largest Buyers of
Government Bonds in the
Last Three Years
10 year Government Bond 3 year Government Bond
RBI's Bond Purchases
6,000
7.0
5,000
6.5
4,000
6.0
3,000
INR Billion
5.5
2,000
1,000
5.0
-
4.5
-1,000
4.0
-2,000
FY20 FY21
FY14 FY15 FY16 FY17 FY18 FY19 Gross Purchase Net
Purchase
Data as of April 2021 Source RBI, Quantum
Research Past Performance may or may not be
sustained in future.
9
Though Accommodative for now, Inflation Risk
making Policy Choices
Difficult
8.0
6.0
4.0
2.0
CORE CPI
Repo Rate
Data as of March 2021 Source MOSPI, Bloomberg,
Quantum Research Past Performance may or may not
be sustained in future.
10
Outlook Volatility Ahead
10 year government bond
1 year government bond
10.0
8.0
6.0
4.0
2.0
Data as of March 2021 Past Performance may or
may not be sustained in future.
11
EQUITY
12
India will be a Large Part of The Global Economy
You Cannot Ignore It
Source Quantum, Angus Maddison, University of
Groningen
13
Indias Continued Reforms will Make India the
Next China
World
India
China
India average 6.1
China average 9.2
14.0
12.3
11.6
12.0
9.9
9.6
9.5
10.0
8.8
8.7
8.5


7.8


8.0
7.1
7.1
6.7
6.5
6.1

5.9
5.8
6.0
5.4
5.3
5.2


4.9




4.0
3.9

3.7
3.5
4.0
3.4
3.3
3.2
2.9
2.3
2.2
2.0
0.0
Jan 80 - Oct Nov 84 - Dec Jan 90 - Jun 91 July 91
- May 84 Congress 89 Congress Janata Dal 96
Congress
Jun 96 - Mar 98 DF
Apr 98 - Apr 99 BJP
Jun 99 - May Jun 04 - May Jun 09 - May 04
NDA 09 UPA 14 UPA
Jun 14 - Dec 20 NDA
Real GDP Growth Source Worldbank, RBI and
www.parliamentofindia.nic.in as of December 2020.
Please note that data used for World GDP for 2020
is a median Estimate since World Bank data is
not yet available and India GDP data is
governments second advance estimate released at
the end of September.
14
Investments drive Growth
Income
Opportunities
16.0
14.0
China GDP
China Capital
India GDP
India Capital
14.0
12.0
12.0
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
growth
growth
0.0
0.0
Source TED Database, As on July 2020.
15
These Opportunities Draw Investors Investments
Cumulative Foreign Direct Investments (FDI) USD
Billion
Cumulative Foreign Portfolio Inflows (FPI)
into Equity and Debt, USD Billion China India
3,500.0
1,000.0
China
India
3,000.0
800.0
2,500.0
600.0
2,000.0
1,500.0
400.0
1,000.0
200.0
500.0
0.0
0.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2019
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2019
Source World Bank
16
Indias Economic Growth Reflected in Corporate
Earnings
Source change in INR, CLSA and Bloomberg
Finance L.P., as of January 31, 2021. CY 21 and
CY 22 are estimate numbers.
17
Based on Historical Data A simple Equity Market
Return Assumption
Indian Equity Market Return Assumptions Expectations Indian Equity Market Return Assumptions Expectations
GDP Growth, real 6.5
Inflation 5.0
GDP Growth, nominal 11.5
If GDP Growth Revenue Growth (Revenues of Typical Companies) 11.5
Profit Growth of Typical Companies 11.5
Companies, listed and in an Index gt Typical Company 13.5
In Long-term Equity Return should Reflect Corporate Earnings In Long-term Equity Return should Reflect Corporate Earnings
Source RBI, CMIE, Quantum Estimates
18
Spiking PER Overstates Valuation Given The June
Quarters Gap Down
Source Bloomberg Finance L.P., as March, 2021
Past Performance may or may not be sustained in
future.
19
Covid-19 Lockdown déjà vu This Time is
Different How is Corporate India Placed ?
The lockdowns are lesser stringent and more
localized this time Corporate Balance-Sheet are
better. The focus has been on debt reduction and
liquidity Last one year has been all about cost
control and business continuity Pvt. Banks
NBFCs have raised capital and are best
capitalized in last 10 years As Global Recovery
is intact, export companies and commodity
producers are comfortably placed
20
Corporate India Listed Companies Are Faring
Better
Data as on February 2021
Data as on March 2021
21
Smaller Companies are Losing Market Share
Sales Growth
Fixed Assets
30
30
20
20
10
10
0
-10
0
-20
-10
-30
-20
-40
-50
-30
-60
-40
Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13
Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16
Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19
Dec-19 Jun-20 Dec-20
Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16
Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19
Sep-19 Mar-20 Sep-20
Top 3 Deciles
Bottom 3 Deciles
Top 3 Deciles
Bottom 3 Deciles
CMIE- Economic Outlook, Data as on December 2020
22
GOLD
23
Has Gold Finally Bottomed?
Both the dollar and bond yields have started to
climb down from their multi-month peaks reached
in March
10-Year US Treasury Yield
US Dollar
US 10 YEAR NOMINAL TREASURY YIELD US 10 YEAR REAL TREASUR Y YIELD
JAN 2021 0.93 -1.08
APRIL 2021 1.65 -0.76
CHANGE IN 3 MONTHS 72 BASIS POINTS 32 BASIS POINTS
Data as of 30h April 2021 Source Investing.com
24
Negative Rates make Holding Gold more Attractive
Lack of yield on fiat currencies supports gold
12
2250
10
2000
8
1750
6
1500
4
1250
USD

2
1000
0
750
-2
500
-4
250
-6
0
1990 Gold price
1995 2000 US Real interest rate
1970
1975
1980
1985
2005
2010
2015
2020
Data as of April 2021 Source Bloomberg Past
Performance may or may not be sustained in future.
25
In A Bid to Boost the Pandemic Stricken Economy,
Governments have
Run Up their Debts to Unsustainable Levels
Global debt levels soar to second World War
levels
Data as of December 2020 Median debt-to-GDP
ratio of country grouping based on G20 advanced
and G20 emerging economies Data as on December
2020. Sources Financial Times, IMF historical
debt database
26
Central Banks on A Printing Spree to Buy
Government Debt
Relentless money printing by central banks
undermines confidence in fiat currencies,
benefitting gold
Trillion
60
10 9 8 7 6 5 4 3 2 1 0
55
50
45
40
35
to GDP
30
25
20
15
10
5
0
US -FED
JAPAN - BOJ
EU -ECB
CHINA - PBOC
Data as of March 2021 Source Bloomberg
27
Gold is a Monetary Asset Gold has kept up with
money supply growth
1600 1400
US Money Supply M2
Gold prices
1200 1000 800 600 400 200
Rebased 100
0 1974 1976 1978 1980 1982 1984 1986 1988 1990
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
2012 2014 2016 2018 2020 Data as of December
2020 Source Fred Past performance may or may
not sustained in future
28
Rising Deficits Debt in the US are Making the
Dollar Vulnerable
Weakness and falling confidence in the dollar
tends to strengthen gold
Data as of September 2020 Source
fred.stlouisfed.org
Data as of December 2020 Source
fred.stlouisfed.org
29
Higher Inflation is on its Way
Gold will be a preferred asset as it generally
moves in line with inflation and has potential to
preserve purchasing power
24
Data as of December 2020 Sources Louis Fed,
lynalden.com
Data as of March 2021 Source Bloomberg
30
ASSET ALLOCATION
31
BLACK SWAN OR BLACK CROW?
26 years, 17 dislocations maybe 4 unexpected

• 1994 the Harshad Mehta scam,
• 1995 the Mexico tequila crisis and the collapse
  of Emerging Markets,
• 1997 the Asian crisis and the collapse of
  Emerging Markets,
• 1998 the bankruptcy of Russia and hedge fund
  Long Term Capital Management,
• 2000 the collapse of the tech bubble,
• 2001 9/11 and the bankruptcy of Unit Trust of
  India,
• 2003 SARS, the Iraq war
• 2008 the bankruptcy of Lehman, the Global
  Financial Crisis
• 2013 Bernanke's twist led to India's collapse
• 2016 Demonetization and the Great Indian
  Economic Slowdown
• 2018 bankruptcy of ILFS
• 2019 Cooperative banks and developers going
  bust,
• 2020 YES Bank, COVID-19

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Rule 1 Embrace Market Cycles
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There have been years when equity markets
had a brilliant run, years when
only bonds were dependable, and years when gold
shined the brightest, and these periods did not
typically overlap
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Sense x 49 Sense x 49 Gold 26 Sense x 83 Gold 23 Gold 32 Sense x 28 Sense x 11 Sense x 32 Bonds 9 Bonds 13 Sense x 30 Gold 8 Gold 16 Gold 28 Sense x 2
Gold 20 Gold 16 Bonds 9 Gold 24 Sense x 19 Bonds 7 Gold 12 Bonds 4 Bonds 14 Sensex -4 Gold 11 Gold 5 Sense x 7 Sense x 14 Sense x 17 Bonds 0.3
Bonds 4 Bonds 7 Sense x -52 Bonds 4 Bonds 5 Sense x -24 Bonds 9 Gold -5 Gold -8 Gold -7 Sense x 3 Bonds 5 Bonds 6 Bonds 11 Bonds 12 Gold -5
Past performance may or may not sustained in
future The chart ranks the best to worst
performing indexes per calendar year from top to
bottom Data as of April 2021 Past performance
may or may not be sustained in future. Based on
SP BSE Sensex Domestic Gold prices and CRISIL
Composite Bond Fund Index Source Bloomberg
Imagine someone holding an all equity portfolio
in 2008, or holding none in the equity rally
that followed?
33
Portfolio Impact of Diversification
33
If you compound your money at 12 per year you
are better off than an investor who makes 25
in one year and loses 20 in the next
Risk-Return Equity Debt Gold Equity Debt Equity Debt Gold
CAGR 11.05 11.00 12.53 7.24 11.41
Annualized SD 9.41 13.53 22.15 3.29 17.37
VAR -15.53 -22.32 -36.55 -5.43 -28.67
Maximum Drawdown -21.43 -36.08 -56.17 -6.29 -25.22
Sharpe Ratio 0.5332 0.3674 0.2936 0.3662 0.3094
Time frame is November 2004 to April 2021. The
period is taken from 2004 since the asset
allocation weights are calculated based on
normalizing the historical monthly equity and
debt indicators. Given the normalization time
frame used in the strategy, data availability for
certain parameters beyond the time frame analyzed
was a constraint. Compiled by Quantum
AMC Equity-Debt-Gold in ratio of 40-40-20.
Equity-Debt allocated in 60-40 range Based on
Sensex TRI, Crisil Composite Bond fund index, and
Domestic Gold Prices Note Past performance may
or may not be sustained in the future
The most diversified strategy yields similar
returns with the lower volatility, compared to a
pure equity strategy
34
Quantum Multi Asset Fund of Fund
An example of dynamic asset allocation
Equity allocation
Sensex TRI
75000
65.00
60.00
60000
55.00
50.00
45000
45.00
30000
40.00
35.00
15000
30.00
0
25.00
Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13
Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14
Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15
Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16
Aug-16 Oct-16 Dec-16 Feb-17 Apr-17
Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18
Jun-18 Aug-18 Oct-18 Dec-18 Feb-19
Apr-19 Jun-19 Aug-19 Oct-19 Dec-19
Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20
Feb-21 Apr-21
Data as of April 2021 Source Quantum MF Note
Past performance may or may not be sustained in
future.
35
2021- A Simple Asset Allocation Strategy to Deal
with Market Cycles
36
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