Mint road has sent out the signal, and the markets are pleased as a punch. First time since the Budget, the equity market closed the week on a positive note on Friday, May 3.
The signal is clear; the Reserve Bank of India is concerned about both growth and inflation. It is ready to adopt a wait and watch policy, while the government fires away at containing prices of food articles and key manufactured products like steel and cement. So the 75 basis points increase in the cash reserve ratio in the whole of April came as a pleasant surprise to both the equity market and the debt market as well.
So the equity markets have started crawling back to 17k plus levels, the rates in the bond market remained stable, despite inflation numbers soaring to the 7.5% level. They also get assurances from the finance minister and other key personnel that inflation will be battled and interest rates will not move inordinately higher.
While the banking fraternity will have to remain tight and manoeuvre carefully in the coming days, as the 75 basis points increase has the ability to shave off 15 basis points from their earnings, corporate India breathes a sigh of relief.
For the investor community at large, another scare seems to be disappearing slowly. Earnings erosion this quarter and the scare of huge dents in the balance sheets of corporates due to overseas derivatives exposure, is not as large as it was initially thought to be.
Net earnings of around 825 companies have grown by 19.5% over the previous year’s quarter. There is not much variance between what the market had estimated and what has been reported. “At least the scares are not there,” says Rakesh Malani, a stockbroker based in Mumbai, echoing the sentiments of many in his community. Earlier, experts had reckoned that the losses due to derivatives could be in the range of Rs 15,000 crore to Rs 20,000 crore.
The fact that overseas institutions have remained optimistic and not deserted India totally also brings in some amount of confidence.
Liquid diet
So while the markets have gained 18% from its bottom of 14,809 it made on March 17, there are other threats that still loom large. “Inflation still hasn’t been tackled and can get really ugly and spoil the party,” says a research head with a leading overseas fund. The derivatives story might not be over yet and the US revival throws up a lot of conundrums. “I am advising my clients to remain extremely cautious at the moment,” he says.
And, a healthy dose of liquidity is quite what the doctor ordered for uncertain times, which have a strong optimistic background. “The India growth story is very attractive and if the government unleashes productivity enhancing measures, then it could very well be one of the largest economies in the world by 2050,” sys Jim O’Neill, head of global economic research with Goldman Sachs.
Inflation and interest rates, remain the key indicators that investors should look out for. Sufficient evidence of improvement on this front should prompt investors to take a serious look at rebalancing portfolios for the longer term. Allocating 20-30% of funds in liquid or near liquid assets could be the norm.
At the moment, liquid funds, arbitrage funds, and fixed maturity plans offer strong opportunities for returns and liquidity as well. “As inflation expectations are set to get better, fixed maturity plans with indexation benefits offer a strong investment opportunity,” says K Ramnathan, head fixed income, ING Vysya Asset Management.
Fixed deposits are strict no-no say financial planners. After calculating tax and considering inflation at 7% levels, they actually offer negative returns, is the reasoning.
Diversification
Uncertain times also call for creating a defence for the portfolio. Clearly, the heady days of extreme vertical growth and uninterrupted runs in the market are behind us. There is growth, but it will be tempered with rational corrections. In such times, the need to have an exposure to defensive stocks becomes paramount. And this is reflected in the fact that since January, the BSE FMCG sector index has actually gained 4.18% when the entire market tumbled. And even when the markets have turned around, the FMCG sector grows at 5% levels, versus the 18% recorded by the Sensex.
During the heady days, allocating 80-90% of the portfolio to high growth sectors was opportunistic. Now, that the overdrive mode is off, it is time to get pragmatic and have around 15-20% exposure to defensive stocks in the FMCG, pharmaceutical, and other consumer sectors. “Growth or no growth, people would require toothpastes and medicine,” said Parag Parikh, chairman of PPFAS and author, in an earlier interview.
There are others who are pointing towards overseas markets for diversification. And this might be an opportune time to actually look at these avenues. Since January, India has featured amongst the worst performing markets, tad better than China. At this time there were other markets like Brazil and Russia, fared much better. And such divergent trends will continue to emerge. Hence, having an exposure to global funds would be a smart move.
Funds like Principal Global Opportunities Fund-Growth, Franklin India International Fund, have been providing the much-required defence. The former invests in overseas mutual funds and has fallen by around 1.2% only.
Adding sheen to the portfolio are gold exchange traded funds. This category has been at the forefront of returns in the past six months and easily outshined others. Devendra Nevgi, CEO of Quantum Asset Management reckons that investors should have a 10% allocation of their portfolios towards gold funds.
Same old truth
At the moment, the stock market regulator has made the path clear for real estate mutual funds and these should be hitting the market by the end of the year as certain technicalities get cleared. These also represent a tremendous opportunity for investors. And hence, the need to remain liquid is higher.
While all these scenes unfold, the age old maxim of regular and systematic investment persists. Some number crunching shows that the SIPs created during lacklustre phases has extremely strong wealth creation propensity. In fact, around 75% of your wealth can get created in such periods. So while the scenario unfolds, having an SIP might not seem to be an amateurish idea, but actually a savvy one.
The concept of averaging is easily one of the most powerful ones created in the field of wealth management, something that need not be forgotten.