Confidence in equities as the best place to park your long-term savings has got to have been shaken. Having just experienced two severe bear markets this decade alone, investors must be questioning their asset allocation towards equities. We run the risk that investors get disillusioned and use any strength in markets to lighten up on their equity exposures. Such behaviour, were it to come to pass, would set a ceiling on the equity markets for the short term at least, as any strength in the markets will be met by selling by investors looking to allocate out of equities.
A lot of the asset allocation policies adopted by many of the real money long-term investors must also be now under question. These policies are based on the framework that over the long term, equities always deliver the highest absolute returns. Most such strong hands, be they foundations, family offices or sovereign wealth funds, must now be questioning their long-term equity allocation. Most have upwards of 50 per cent in equities, and given the poor performance of equities vis-a-vis bonds, this number must be under debate. Also given the beating many of these institutions have taken over the last year, they must be anyway in a mode to curtail their risk appetite. I am not sure these institutions were set up to be able to handle the type of volatility and synchronised drawdowns that we saw in 2008. Could we see a wave of rebalancing coming up from these strong hands? If we do, that is a real problem, for there are no other strong hands in prospect which could absorb these flows.
...All of the above obviously point to the risks we see if investors start questioning the long-held assumption of equity being the highest returning asset class. However, the horrendous performance of equities over the last two decades also may point to us coming to a really attractive long-term entry point for global equities vis-a-vis government bonds and cash.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at firstname.lastname@example.org