2002: Peering into the crystal ball

Jaikumar NR, Sujoy Manna,
Prashant Kothari & Sudhir Shetty

The year 2001 was tumultuous for the investment markets, with some winners and possibly a larger number of losers. With sentiments and fundamentals indicating a recovery, the players provide an insight into what could be in store.

Equities
The equity markets, after dipping to an eight-year low in 2001, may prove to be better in the year 2002 for investors. Fund managers and market experts believe that short-term gyrations in the stock market should not deter investors from entering the market and they should stay invested. Equity stocks started looking up since September mainly propelled by gains posted in sectors like technology, pharma, FMCG, cement, auto and PSUs. However, recently these stocks have shed some of those gains followed by the terrorist attack on Parliament and subsequent war tensions.

"Equity should outperform other investment options over the next couple of years. The Indian economy has been growing at a healthy rate of over 6 per cent in the last decade. However, the slowdown in the industrial sector during the year 2001 is a short-term aberration and with many companies restructuring and growing lean, things should start looking up this new year onwards," says Vivek Reddy, CEO, Pioneer ITI Mutual Fund CEO.

According to the IL&FS Mutual Fund monthly report: "Indian markets are attractively valued with the potential upside from a recovery significantly higher than the likely downside in case of a delayed recovery. We believe that it is an opportune time to partly and selectively increase weightage towards stocks with linkages to global economy."

Pranav Securities CEO Rajesh Jain points out: "Most sectors are looking attractive on the basis of fundamentals". He also adds that the Sensex could move in the range of 3000 to 5000 this year providing entry and exit options for regular market players.

Market experts also advise investors to pay attention to their investment timing. "Equity investors should learn from mistakes committed during the past two years. They should have a long-term perspective while investing and never endeavour to time the market. Instead, they should be disciplined investors with a regular investment, either monthly or quarterly," adds Value Research CEO Dhirendra Kumar.

He is also optimistic about equity mutual funds: "Market is poised for a take-off and the downside is limited. Investors now have a wider choice among various mutual funds. The choice ranges from diversified equity schemes, funds with marginal diversifications, balanced funds, equity speciality schemes, sectoral funds, schemes which provide tax benefits, growth, etc.

Fund experts believe that equity investors should go in for well-diversified mutual fund schemes with a long term investment perspective. An investor should look for two key factors while investing in a diversified fund. First, a track record of consistent performance and second, prudent diversification across all sectors and companies. Investors, having knowledge of a particular sector, could also allocate a marginal portion of their portfolio to sectoral funds.

Equity derivatives
Market experts believe that derivative markets, yet in their nascent stage, have tremendous scope for growth in volumes. Also contributing to the increased activity are measures allowing participation by FIIs, increased activity by the domestic institutions which will infuse liquidity attracting yield players, likely reduction in the minimum contract size and introduction of physical delivery for settlement of derivative contracts. For the investors, a deepening of these markets bodes well as opportunities for hedging, speculation and arbitrage emerge.

Refco Sify managing director Vineet Bhatnagar said: "The turnover in derivatives should be at least 50 per cent of the cash market turnover by year end." Motilal Oswal of Motilal Securities Limited is even more bullish saying that the derivatives market could run parallel to the cash market and beat the total turnover in the cash market by the year end. Rajesh Jain explains: "Derivatives require strategies to be worked out instantly. A smart player, who understands these products, can leverage tremendously to gain better yields, just as badla was once used."

Debt
In 2001, investors moved in droves to debt investments to escape the uncertainties in the equities markets. IDBI Principal Asset Management Co Ltd’s head, fixed income, Binay Chandgotia says: "While 2001 was special for interest rates and provided maximum gain for investors who bought and held on to their positions, the trends for 2002 are still uncertain."

Says Riskxpress.com head, product development and marketing, Sudhir Dash: "In 2002, with interest rates stabilising, investors should look at more liquid investment opportunities from where they can liquidate and go cash very quickly."

Efforts are also being made by the regulators and primary dealers for retailing of government debt and widening of the debt markets. However, dealers do not view the market as being vibrant and developed enough to attract more players. The awareness for debt related products is at a nascent stage compared to the global markets and retail reach is limited. "The fixed income securities market has remained an exclusive domain of wholesale players," says Dash.

"Debt funds are attractive given their flexibility and tax-friendly nature in comparison to other similar investments," Vivek Reddy points out. Adding that investors should prepare for pre-tax returns of around 8-9 per cent from a well-managed debt fund, he emphasises that the interest rates scenario could be stable next year and, therefore, the returns from the fund should track the running portfolio yields and may not be able to sustain last year’s yields.

He adds, "The high returns during the calender 2001 from bond funds were aided by a very sharp fall in interest rates - the yield from the benchmark 10-year government securities fell by 275 basis points, which could easily be the sharpest single year fall in the last decade. This obviously cannot be repeated. Bond funds will continue to give returns better than bank deposits due to the tax advantage. Fund experts suggest that fixed income seekers should tone down their expectations on returns as bond funds may not be able to sustain last year’s yields.

Insurance
Estimates indicate that there are only eight crore insurance policy holders out of an ‘insurable population’ of around 35 crores in India as of March 31, 2001. Private players, who recently started soliciting business in India, are keenly playing up to this untapped segment.
Even though the products offered by these players and the premiums charged are more or less similar to those of the Life Insurance Corporation of India, the sentiment remains one of adopting a ‘wait and watch’ policy towards the new players. An LIC official indicated that since April 2001, LIC has sold insurance policies worth Rs 8,500 crores. Private players have garnered a business of around Rs 250-300 crore as indicated by an official in a private insurance company.

"It is too early to decide on an insurance cover from private sector companies as a lot remains to be seen, especially on the claims processing front," said a high net worth individual who has an endowment policy with LIC. "Since insurance is a long-term savings avenue for me, I would not like to get stuck with any private sector player now and then repent in the future. I would wait for a while till a few more competitors launch similar products. Only after comparing the products and the service of these companies would I think of having a long-term relationship with them," said a businessman.

Small savings
Small saving schemes such as Public Provident Fund (PPF), National Savings Certificate - VII (NSC), Kisan Vikas Patra, Post Office Monthly Income Scheme, etc, are still popular avenues for investment primarily due to the tax benefits and the safety factor arising from government control. The current features of these schemes are:

PPF: 15 years scheme. Rate of return 9.5 per cent (effective rate of return 9.9 per cent, interest compound monthly).

Tax benefits: (1) 100 percent exemption on interest income. (2) Rebate u/s 88 on investments upto Rs 60,000.

NSC: 6 years scheme. Rate of return 9.5 per cent (effective rate comes to 9.7 per cent, interest compounded half yearly). Tax benefits: (1) Interest upto Rs 12,000 can be claimed as deduction u/s 80L. (2) Rebate u/s 88 on investments upto Rs 60,000.

Other small saving schemes are structured on similar lines with some variations. The National Savings Scheme, for example, a 4 years scheme gives a 9 per cent rate of return and has the same tax benefits as that of NSC. On the other hand, Kisan Vikas Patra, a 6.5 years scheme gives 9.5 per cent interest but without the tax benefits.

Small saving schemes have already witnessed two rate cuts from 12 per cent to 9.5 per cent. "Considering the fall in interest rates locally as well as internationally, it seems that there may be a fall in rates once again.

Small saving schemes offer an average 9.5 per cent return with tax benefits as compared to the 8.5-9 per cent return offered by banks such as SBI. This has increased the interest burden of the government which may consider lowering the interest rates," said an economist with a reputed brokerage house.

Fixed deposits
Fixed deposits remain a favourite alternative in times of uncertainties. However, the rate of interest (ROI) on bank fixed deposits have been falling steadily over the last year (one year deposit rates fell approximately by 150-175 basis points).

Here’s an indication of the existing range of interest rates offered on fixed deposits. For a time period of more than one year but less than two years the range is from 7.75 per cent offered by SBI to 9.25 per cent by Global Trust Bank. Similarly, the ROI on a one-year FD with non-banks ranges from 7.5 per cent on deposits kept with NTPC to 12 per cent for deposits kept with Bharat Bijlee.

"The rates offered by banks may come down as demand for money has fallen down significantly. There are no major capital intensive projects coming up as there is already an over-capacity situation in most of the industries," said Mr Ramesh Jagtiani, an investment expert.