Probably the most often asked question for an investment professional is, “When is the right time to invest”? Frankly, the answer to this is placed in the basic fact that, ‘when the investible valuations are attractive’. By this, I mean that the prices may not necessarily be rock-bottom (though would be ideal); but that the price at which you are buying an exposure into the asset is justified by its intrinsic value. This is important, especially in an asset class like equity.
That is because, the irrationality of excessive exuberance or pessimism tends to escalate or deflate the asset value than the fundamental strength of the stock would necessitate. Therefore, if an investor is not price-conscious, he/she may end up investing in an over-priced asset. Off course, buying an undervalued asset is ideal, but the prevalent sentiment tends to deter most retail investors from availing such opportunities. Thus, from a retail investor point of view, this value-consciousness is necessary. That is because; most of the investing periods tend to overlap in a largely sideways market.
Now, to appreciate the investment rationale in the current setup, the primary question to ask is; what does the environment suggest, to whom would it be beneficial (now or later), and is the price right? We know that our economy has moderated significantly since the heady 8% plus growth days. The latest growth estimates are in the 5.3% range. The IMF is putting its growth forecast for Indian economy at around 5.9% for CY2013. The industrial growth in the economy has come to almost a halt; and may have even gone slightly negative.
This situation is attributable to high interest rates (repo currently at around 8%), which has increased the borrowing cost and deterred commercial investment and expenditure. The original reason for this rate regime was the sticky inflation; which in turn was triggered by the high cost of fuel imports.
But the scenario is changing rapidly. Increasingly, GDP growth has come to gain primacy for the policy makers. This is in the light of the fact that upside volatility in international prices of oil may now be limited, since the US is becoming increasingly self-reliant due to shale oil technology. This, along with the bottoming-out of the rupee suggests that the pressure of imported inflation may begin to dissipate in the coming months. Along with that, the rising political resolve to fix the economy is also a positive. Even by the parameters set by the RBI, the inflation outcomes have come to look more favourable. We believe that inflation growth may moderate even more as we approach the next financial year.
In this backdrop, it is becoming increasingly likely that the central banker may resort to a rate cut to boost up sagging capital formation. The debt market is already discounting a 25 bps rate cut in the next policy meet. We believe that, over the calendar year, we might see around 50-100 bps rate reversion in the upcoming cycle.
This is expected to provide a cushion for growth in the economy and revup the investment formation cycle on the supply side. Additionally, the reduced financing cost is expected to provide a demand fillip as more retail investors prepone their purchase decisions to avail of reduced borrowing costs. This might help the loan book of many lending institutions and may also help address the asset quality issues more effective. What is more, the increased valuation of their SLR/bond holdings may also augment their treasury income.
For the same reason, the retail demand in other rate sensitive sectors such as realty and automobiles too may get a boost. However, that may be dependent on the pass-through that a retail consumer may gain from the rate reversion.
However, the question that how these sectors playout in the equities market; is altogether different. For one, the FII-led liquidity flow continues to remain a key determinant for the market. To add to that, the valuation levels, the business prospects and the management efficacy too need to be assessed.
This therefore does not necessarily imply that the ‘defensive’ sectors such as healthcare may underperform the market. However, the weightage for underlying fundamentals would become increasingly important from the investment point of view and therefore a case-to-case assessment may be needed.
Thus, if history is any indicator: were the economy to do well, high-beta sectors might outperform the larger market. But then, while the history may repeat itself, it is never the same.
The author is CEO, Kotak Mutual Fund