How to build a resilient portfolio to achieve sustainable growth

“A calm sea does not make a skilled sailor.” This ancient wisdom holds true in the investment arena, where an investor’s skills are often tested by the onslaught of market volatility and other unpredictable and uncertain macroeconomic events on a global scale.

Given the turbulence that periodically arises in global and domestic markets, it is critical for retail investors to begin building a resilient portfolioThorough research and a strategic approach to diversification are essential to navigate that volatility and achieve sustainable growth in your portfolios.

Take the COVID-19 pandemic, for example, which created unprecedented market disruption, shaking global markets and exposing vulnerabilities in many portfolios. During this crisis, sectors such as travel and hospitality were hit hard, while technology and pharmaceuticals thrived. Investors who had diversified their portfolios, with a mix of stable, fundamentally sound stocks and growth-oriented technology investments, fared better. For example, companies such as Information systems and Sun Pharmacy Not only did it weather the storm, but it also took advantage of the surge demand for digital solutions and healthcare products.

In a more recent global development, the war in Ukraine led to significant volatility in global markets, affecting commodity prices and supply chains. Indian investors with diversified portfolios across asset classes, including stocks, bonds and gold, were better positioned to mitigate the adverse effects of these geopolitical tensions. Investments in sectors such as defence and energy, along with safer assets such as government securities, provided a buffer against market uncertainties.

Case Study 1 (Opportunity Identification): During the Russia-Ukraine war, global LNG and crude refining margins rose sharply to $71/mmbtu (from an average of $27/bbl before the start of the war) and $30/bbl (from an average of $6.6/bbl before the start of the war) respectively, given the concerns over supply bans to Russia. During this period, the company engaged in the oil refining business generated phenomenal returns (MRPL/Chennai Petroleum/RIL share price generated 3x/3.4x/22% return in less than four months). However, on the other hand, LNG consumers like CGD companies were seriously concerned about their margins and the same is reflected in the sharp 30% drop in the share price of MRPL/Chennai Petroleum/RIL. Gujarat Gas during the initial period of the war between Russia and Ukraine.

The importance of thorough research and strategic asset allocation is becoming more evident. By analysing market trends and understanding the potential impacts of global events, investors should build portfolios that are resilient to shocks and can be poised for long-term growth. Periodic review and adjustments of the portfolio, based on evolving economic conditions and global events, help maintain a balanced risk-reward profile and achieve sustainable wealth accumulation. Case Study 2 (Selecting the Right Sector): Analysis of key sector indices clearly indicates the importance of sector rotation as few sectors would outperform the broader markets over a given time period and few could underperform depending on the sector tailwinds. We highlight here that the automobile sector outperformed the broader markets with returns of 22% between December 2011 and December 2016 as against 12% return of the Nifty-50 index over the same period. However, between December 2016 and December 2019, the automobile sector underperformed with a negative return of 3.4% (against the Nifty-50 index’s return of 14%). On the other hand, IT and Banks outperformed with returns of 14.6%/21% between December 2016 and December 2019. Therefore, investors who had invested in the automobile sector between December 2016 and December 2019 would have underperformed the Nifty-50. This clearly indicates the importance of sector rotation in investing to generate alpha returns and emphasizes regular portfolio review and adjustments. To navigate such complexity, a suitable financial advisor can be a game-changer. An expert advisor can provide personalized guidance based on comprehensive market research and individual financial goals. For example, during periods of high inflation or economic uncertainty, an advisor can recommend adjustments in asset allocation or suggest investments in inflation-protected securities. As the digital economy in India is in a growth phase, investors can restructure portfolios by including stocks of fintech and e-commerce companies with stock fundamentals. The broad impact of the Make In India initiative on sectors such as infrastructure, railways, defence and banking etc. will offer more portfolio diversification opportunities to investors. Depending on risk tolerance, investors can also weigh options to include local mid-cap stocks in their portfolio. Urbanisation and consumption are also emerging as dominant themes in portfolio diversification. Regular monitoring of the Fed rate movements and their impact on the economy is necessary to make sound portfolio diversification decisions. As inflation is within target levels, investors across the world are eagerly awaiting the outcome of the September Federal Open Market Committee (FOMC) monetary policy meeting.

A good advisor also helps with regular portfolio reviews and rebalancing, ensuring that investments remain aligned with changing market conditions and personal goals. He or she brings experience in navigating regulatory changes and complex financial products, making it easier for investors to make informed decisions.

In short, while individual research and strategic diversification are crucial, partnering with an expert financial advisor only amplifies these efforts, providing an additional layer of expertise and a personalized strategy to build a resilient, growth-oriented portfolio.
Sector rotation: key to alpha generation

Source: NSE; JMFS Research

(The article is written by Dimplekumar Shah, Managing Director and Co-Head, Investment Advisory & Distribution, JM Financial Services Ltd.)