Attractive returns despite interest rate uncertainties

Feb 04 2013, 08:55 IST
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SummaryFixed income markets should perform well in 2013 with long bond/flexi bond funds likely to deliver returns.

The year 2012 was a good one for investors in India, with most asset classes delivering strong returns. Equities were up 25 per cent over the year, most categories of fixed income funds too delivered returns in a range of 10-15 per cent and gold rose by 11.5 per cent. Meanwhile, the rupee reflected macro worries that engulfed India, losing around 3.5 per cent in value.

Unlike 2012, where domestic investors for a major part of the year were left to worry about India’s vulnerable economic situation, 2013 has started off with a measured feeling of hope and optimism. The announcements of reforms in the last few months have been a big positive; however, the successful execution of these would drive sentiments and markets. In January, we again witnessed a string of actions from the government. In a decisive move to contain oil subsidy burden, the government announced a calibrated hike in retail diesel prices and one-shot hike in bulk consumer sales at market rates. Secondly, to control gold imports, the government announced a hike in import duty from 4 per cent to 6 per cent with immediate effect.

These measures are an attempt to lower risks from twin deficits — fiscal and current account, which clearly rank as top priorities for India’s policy makers. The combination of cheaper credit as a result of lower interest rates coupled with a conducive policy environment is expected to kick start the domestic investment cycle and this should be well supported by foreign investment flows. Year to date, Indian equities rose by 3.0 per cent and bond yields declined around 16 basis points on expectations of lower interest rates. Moreover, rupee appreciated by 3.2 per cent against the US dollar in light of strong FII flows.

The year also started on a positive note globally. The macroeconomic and fiscal uncertainty, which dominated the global landscape for most of last year has declined in light of increased optimism. Financial markets saw a rise in prices of risky assets as concerns on sovereign debt crisis in Europe, US fiscal cliff and China’s slowdown eased.

We believe 2013 will be a year of moderate global growth; however, some divergence will be seen at a country level with some experiencing recession and others growth.

Economic policies — monetary and fiscal — will be the catalysts for financial markets. With policy rates in major developed economies already close to

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