Structuring a portfolio ensures that you are always ahead of the curve. Understanding macro and microeconomic factors are key to beating the market. It is easy to make money when investor confidence is high and the economy is doing great. But what happens when the picture isn’t so rosy. Would the same strategy work when the economy is struggling? High-interest rates could be coupled with rising inflation. Or currency depreciation with rising crude prices is rising could put a strain on fiscal deficit targets. Clearly, macros play a vital role in portfolio construction.
The same portfolio that was created during a bull run is no longer the money-making machine you thought it would be. This means that you need to reset the weights across asset classes and sectors. In a bull run the prices of stocks regardless of quality and potential set new highs, but when the tide turns, a correction takes place that could reduce the value of your portfolio.
Preparing for the receding tide is crucial. What you need is healthy diversification in the portfolio that enhances risk-adjusted returns. For example, let’s take a situation where crude prices are rising leading to an increase in fiscal deficits and a depreciating rupee. This is likely to cause bond yields to rise. The risk-adjusted returns from debt as an asset class may look appealing at this juncture. Global uncertainty and headwinds could make gold more attractive. When the rupee depreciates, exporting countries may benefit. By allocating the right proportion of investments towards hedging such macro factors, you could gain in relation to the risk undertaken.
What you need to work towards is a gradual shift in the framework of your portfolio in different economic conditions. As an investor, preparing investments for the next phase plays a major part in being ahead of the curve. Preparation can give you a sense of when to enter and when to exit the market. Therefore, a perfect blend of understanding, reviewing, and acting on advice could result in higher returns.