Question

In the space provided, imagine you had $10M USD. How would you position yourself to take advantage of the tremendous amount of monetary and fiscal stimulus? This is an open-ended essay, so please don't feel that there is only one right answer.

Answer 1

The interest rates are at a record low & about to enter into negative territory in the US as well. The Fed is maintaining sufficient liquidity in the system through its discount window operations. This means that the interest rates will remain low for at least a year till the economy comes back onto tracks and the lockdown from Covid-19 is over. Whenever interest rates are kept very low, the years that follow have shown double-digit equity returns in the past.

The stock market is already in a bearish phase and valuations of benchmarks in terms of P/E are at a discount as compared to historical levels. This creates a good buying opportunity for an investor for a long horizon of investment in mind.

The fiscal stimulus will ensure that the government will try to bail out stressed sectors by either through loan waivers or equity infusion. Restructuring of the nonperforming loans will be allowed as well. This means as situations improve, companies will be given full support by the federal government to ensure that they stay going concern.

If I have been given $10 m USD, I will divide my portfolio into two parts: (a) Equity (b) Money market instruments

I will start investing in Equity (on S&P benchmark) in a phased manner and refrain from investing in select few securities to avoid idiosyncratic risk. By the end of 1 year from now, I will invest 50% of my portfolio in equity & shall keep the remaining in money market instruments. As the situation & earnings improve, I shall increase my exposure to 70% in equity. The rest 30%, I shall keep holding as cash