Yuletide spirit is upon us as we are just getting over with the Chirstmas session. There is a nip in the air and hope has burgeoned in our breasts due to the seeming revival in the stock markets. But is this for real? This seems to be a liquidity driven rally, primarily being driven by FII inflows. So, is it safe to expect that stock market would go up from here?
As it is, most investors have missed the rally, when Sensex has returned about 25% till now. 25% is not exactly something to scoff at, which incidentally is higher than the returns from gold & property, the current darlings of the investors. Does this say something?
It should. What it indicates without a shred of doubt is that, different asset classes perform at different periods and cashing out when they offer poor returns is not a wise thing to do. It also reiterates the fact that equity can bounce back and do so quite smartly, in double quick time. Investors MF portfolios which were showing measly returns are now showing respectable 8-12% returns, based on when they had invested and the composition of their portfolios.
The question uppermost in investors’ mind now is what they should do in 2013. Well, I’m no Oracle and you need to accept that peering into the future at best offers a 50:50 chance. So let us rely on possible deductions which may point to possible trends and investment options could hold potential.
1. Debt Instruments : I don’t have to be a genius to say that the interest rates are at a peak now. So, for all those who need to allocate to debt, this is probably the best time. More so, because the returns offered are good. Bank FDs are offering about 9.25%-10% for 1-5 year tenures. Knowing that this can only come down, this is the time to lock-in on these rates.
At this point, we have many issues of tax free bonds lined up, which for retail investors are offering about 7.7-7.8%, for a tenure of between 10-15 years. Tax free returns to this extent, that too over such a long-tenure is attractive. Those looking for accruals over time, should seriously consider these tax free bonds. Look at their ratings though.
Debt funds hold out great potential too. Especially, medium to long term funds are well positioned to reap the downward interest rate cycle, which can potentially last for the next 2-3 years. Actively managed debt funds are even better bets as that would allow the fund manager to take active calls on duration as well as the kind of underlying assets that should go into the fund.
Investing in the beginning part of the year will allow an investor to capture better rates. Those of them who do not want the money for the long term, should look at tax-free bonds and longer tenure FDs.
Equity : Now, this is seriously difficult. Many are getting bullish on equity. Though the Government has shrugged off the inertia and has started on the reform path, the ground realities in lots of sectors need to improve dramatically. For instance, opening retail is one thing and for an entrant to set up the store is entirely another. There are about forty approvals required apparently, before opening a store and getting all that approvals without greasing palms( Walmart wants to try that ), is well, challenging! Government has tied up the metals sectors in knots – no iron ore, no bauxite is available, due to which those in this space are having huge problems. Coal availability was also a problem. That is exactly the case with lots of other sectors as well, where some smart regulations alone will not pump-prime the economy. We need to seriously shear the red-tape, for the economy to move ahead.
The current liquidity is what is fuelling the uptrend. That clearly is unpredictable and unsustainable. However, things can improve, if government displays more will in clearing the multiple hurdles that are strewn on the highway of growth. However, since we are close to the next election in 2014, expect lots of populist measures in 2013, which would worsen deficits and hamper the economy.
Equity investment is for the longterm. If we were to go with this, 2013 would be a year when you should stay invested in equities and continue putting money on a systematic basis. No predictions are possible about their returns for the year; however, the longer term outlook for equities remains bullish.
Gold : Gold has given good returns in rupee terms but not in dollar terms. Rupee is expected to appreciate this year. Gold returns are hence expected to be muted. Invest in the metal, but keep the exposure 5-10% of the portfolio, nothing more. And do those investments on a regular basis, through ETFs.
Property : Lots of people are pulling money from all available sources and putting it in property. The property prices have built up to an extent that, even the loaded find it difficult to buy at current elevated prices. Growth will be there, but will be muted, especially in markets like Mumbai, Delhi, Bangalore etc., where the property prices have already rallied in the past. Growth will come for those investing in tier-2 & tier-3 cities. When investing in property, do the due diligence and invest if available at attractive prices.
Having said all this, draw up your broad asset allocations and stick within those. A small deviation due to tactical reasons, is fine. But completely altering the asset allocation just because one asset class is performing well at that point, will ensure that you set yourself for disappointment in future. For this, I don’t have to be an Oracle. This is rather obvious, isn’t it?