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Being enveloped with downbeat global economic news, Indian equity markets have corrected by good -12.8% in the present quarter (i.e. from July 1, 2011 to September 22, 2011) and 22.1% since the last high 21,004.96 – made on the November 5, 2011 (the Muhurat Trading Day). The backdrop of following global economic events has literally sends shivers down the spine of several investors – both in Developed Markets (DMs) as well as Emerging Markets (EMs).
· Debt overhang situation in the Euro zone
· Downgrade of Greece’s sovereign rating from “Caa1” to “Ca” by Moody’s
· Downgrade of Italy’s sovereign rating from "A+/A-1+" to "A/A-1".
· Downgrade of U.S. sovereign rating from ‘AAA’ to ‘AA+’ with a negative outlook [due to increase in debt-ceiling limit to U.S $16.4 trillion, in midst of dismal economic growth rate (last quarter i.e. April 2011 to June 2011, GDP growth rate was mere 1.00%) and rising unemployment rate (9.1% in August 2011)].
· Accentuating inflationary pressures in the Emerging Market Economies (EMEs), including India
But rather than pressing the panic button and following the herd mentality; if we look at India specific economic dynamics, realization would dawn that the GDP growth rate offered by India is far more appealing than in DMs.
Yes, we have contracted to 7.7% in Q1FY2011-12 as RBI’s has maintained its anti-inflationary stance (of increasing policy rates) to tame inflation. But, the stance followed by RBI are indeed needed when most EMs are facing the brunt of rising in commodity prices. Corporate Advance tax numbers even though they have dwindled to 9.9% in Q2 FY2011-12 as against 19.0% in Q1FY2011-12 (due to brunt of rising interest rates), the long-term corporate earnings for companies with good management look fairly sustainable – especially if we consider the strong consumption theme and well-regulated banking and financial services sector. Moreover, going forward if FDI is encouraged (by building suitable infrastructure), it would further provide thrust to India’s economic progress. We believe that an economic growth rate of over 6.0%-6.5% (on an average) is good to attract foreign flows.
As far as the depreciation in the Indian rupee is concerned, it would be a short-term phenomenon given low confidence. The U.S. Dollar would depreciate going forward given the economic problems heaping there along with near to zero interest rate regime prevailing there.
What should investors do?
Hence taking a holistic view of the aforementioned global and domestic economic factors we encourage you investors to participate in the Indian equity markets, and avail of the present reasonable valuations. However, since we may see the aforementioned global economic headwinds unfolding, staggering your investments would be an appropriate approach. We recommend that you invest in diversified equity funds as this will help reduce risk (however one needs to stay away from U.S. or Euro oriented offshore funds in such a scenario). You may get defensive and invest in value style funds (as fund managers may perceive good value buying in these corrective phases on the equity markets) and also large cap funds. It would be prudent to opt for the SIP (Systematic Investment Plan) mode of investing as this will help you to manage the volatility of the equity markets well (through rupee-cost averaging) and also provide your investments with the power of compounding.
Remember, while investing select only those equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.
Safeguarding aganst, the downbeat economic factors gold is likely to be bolder going forward. As long as worries of soverign debt crisis prevail, gold would continue its north-bound journey. Moreover, the precious yellow metal would act as an hedge against rising cost of living as well. At Personal FN, we recommend that you should have a minimum of 5%-10% allocation to gold. Invest in gold with a long term perspective with a time horizon of 10 to 20 years.
As far as the depreciation in the Indian rupee is concerned, it would be a short-term phenomenon given low confidence. The U.S. Dollar would depreciate going forward given the economic problems heaping there along with near to zero interest rate regime prevailing there.
What should investors do?
Hence taking a holistic view of the aforementioned global and domestic economic factors we encourage you investors to participate in the Indian equity markets, and avail of the present reasonable valuations. However, since we may see the aforementioned global economic headwinds unfolding, staggering your investments would be an appropriate approach. We recommend that you invest in diversified equity funds as this will help reduce risk (however one needs to stay away from U.S. or Euro oriented offshore funds in such a scenario). You may get defensive and invest in value style funds (as fund managers may perceive good value buying in these corrective phases on the equity markets) and also large cap funds. It would be prudent to opt for the SIP (Systematic Investment Plan) mode of investing as this will help you to manage the volatility of the equity markets well (through rupee-cost averaging) and also provide your investments with the power of compounding.
Remember, while investing select only those equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.
Safeguarding aganst, the downbeat economic factors gold is likely to be bolder going forward. As long as worries of soverign debt crisis prevail, gold would continue its north-bound journey. Moreover, the precious yellow metal would act as an hedge against rising cost of living as well. At Personal FN, we recommend that you should have a minimum of 5%-10% allocation to gold. Invest in gold with a long term perspective with a time horizon of 10 to 20 years.
By PersonalFN: PersonalFN has been providing independent and unbiased research on Mutual funds, Insurance, Fixed Income instruments in India and Gold since 1999. It provides premium mutual fund research and financial planning solutions to individuals
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