LGT Wealth India

Rajesh Cheruvu, chief investment officer and managing director at LGT Wealth India Private Ltd., said in the past 15 years or so, many multinational financial institutions have come and exited Indian markets and the latest incident was making wealthy investors nervous.

How to inflation-proof your portfolio. Here are 5 things you can do

ETMarkets, 14th April 2023, Rajesh Cheruvu

CY23 did not start well for India — commencing with an incisive activist short seller almost indirectly taking on the entire sovereignty.

When the time was beginning to heal the wounds, another debacle in the form of a slightly non-conventional (and thankfully at least, a non-systemically significant) US bank going bust for a diverse variety of reasons — spanning from inconsistent Fed language to ALM mismatches to lack of proper KYC processes on the depositor side of the bank’s balance sheet — dashed market sentiments globally and domestically.

Of course, the definition of systemicity itself set by the various US regulators and governing bodies is also now up for intense debate.

When it rains, it pours; along came another falling domino effect in the European banking space: a nervy Credit Suisse being “denied” extra funding from its largest shareholder — albeit, in reality, due to regulatory reasons only.

However, markets currently read (likely, in the case of Credit Suisse, Misread) more between the lines in the hope of weeding out risk.

Consequently, some caution might lurk around in markets in the immediate short term, and multiples may see some softening. However, in the longer term, India is relatively isolated from these events. Indian banking system’s rules are pretty robust.

Post our own NBFC ALM crisis, our financial institutions have a much more diversified liability franchise, and SEBI’s unrelenting push for UBO disclosures should eventually prevail over the longer term.

Even when shares of one listed US consumer electronics retail company underwent a severe short squeeze, an “Indian-ized” scenario would be nipped in the bud — thanks to our exchanges’ stringent filters like circuit rules and ASM frameworks.

Inflation is a capital-hungry beast as it eats into one’s portfolio’s purchasing power. To stave it off, one could consider floating rate debt instruments where at least coupon payments received are indexed to inflation, if not the entire principal, when held to maturity.

Secondly, one could consider the equity of listed companies where inflation in COGs can be passed on to the company’s customers — possible examples being companies whose products have high brand stickiness and pricing power.

To an extent, certain commodity companies might also have near -100% pass-through being pure value-add processors of input raw commodities.

Thirdly (and fourthly), listed securities with payouts as a higher proportion of their total return profiles are also a safe bet to counter inflation — InvITs and REITs.

Lastly, direct investment in real estate is also an option (if available): rental yields are indeed linked to inflation, being directly part of the CPI basket, and given that several properties are in the phase of redevelopment, there is an additional demand for rent stemming from subsequently displaced households.

WFH trends also harden rental yields. Capital appreciation in real estate depends on each micro-markets’ idiosyncratic nuances, but overall rental yields should protect against inflation.