Stagger any equity investments over a period to average down costs.
The last fortnight brought an unending stream of bad news for India and the world. Tensions in pan-Arabia continue. Crude and gas prices will spike if Iranian exports are embargoed. The eurozone crisis is not yet resolved. There's unrest in Russia.
Domestically, the gross domestic product (GDP) growth rates have been revised downwards. Policy deadlocks continue with the rollback of foreign direct investment (FDI) in retail and the failure of the Unique Identification (UID) Bill. The government has admitted exports in the first half of the fiscal were overstated by around 9 billion dollars. The trade gap could hit 150 billion dollars by year-end. For the first time in several years, the ratio of forex reserves to external debt is below one.
Industry after industry has seen earnings and sales projections pared down and credit rating downgrades have also occurred across the board. About the only ray of sunshine at the moment is an apparent reduction in food inflation. The stock market headed downwards towards the end of the week. The rupee plunged to a new intra-day low versus the dollar before it made some recovery.
In these circumstances, any Indian investor must be scratching his head. One must do something with one’s savings. What are the comparative advantages and disadvantages of commonly available assets at the moment?
There’s equity. Valuations are much higher than the current fundamentals warrant. And given that the news isn’t getting better, there is every chance of further bearishness. The fact that several influential foreign institutional investors (FIIs) have advisories stating that they would remain underweight on India in the near-term, is another indication of a potential downside. So there’s certainly a case for waiting.
However, in the medium-term of two or three years, there should be an upside as well. It’s a fair bet that the Nifty would be back above 6000 in two years. That’s roughly 20 per cent (absolute) gains from current levels. If the market corrects by another 10 per cent, the upside would be 33 per cent. If the market corrects by 20 per cent, the upside would be 50 per cent. So there’s also a case for staying invested.
Debt assets gain in value when interest rates start falling. This hasn’t happened yet. But there have been initial signs that inflation may be peaking out. Given slowing growth and flatter inflation expectations, the Reserve Bank of India (RBI) could pause, or start a trend of cutting policy rates soon. In that case, there would be a rally in debt mutual funds. The first signals of such rate cut-expectations would most probably widen the yield curves on Government Securities (G-secs). There’s hope that this might happen now but yield curves are still very tight.
Precious metals are an obvious safe haven in times of currency turmoil. This could be a saving grace for India, where every household hoards as much gold as it can. But gold is a risky asset right now because it’s already been bid up to unprecedented levels. It will crash on an economic recovery and it will correct downwards at the next sign of currency stability.
Among other commodities, non-precious metal prices are soft and likely to stay soft until global demand recovers. Crude and gas could swing higher for geopolitical reasons as mentioned earlier. Agricultural commodities are weather dependent and need to be dealt with on a case-to-case basis.
Real estate is suffering from a slowdown. The sector is among the worst stock market performers. Every real-estate major is cash strapped. However, housing prices haven’t dropped so much as stagnated, while volumes have dried up.
Housing mortage offtake has also slowed. Lots of incomplete projects have been stalled because of cash flow problems. Logically, this should lead to further falls in real estate prices. But the market is both opaque and distorted. All one can say is that real estate prices won’t rise until there is a cyclical recovery. So if you’re looking to buy real estate as an investment, you won’t lose by waiting.
In short, nothing looks good. The best asset-allocation may be to stay in near-cash equivalents such as short-term fixed deposits, or money market funds. The debt fund market could turn around first and it has the least apparent downside. Equity has a deeper downside risk and any stock commitments should be staggered to average down.
If you want quick returns, dabble in forex and look to sell the rupee. Also try to take the short side in derivatives across the commodity and equity space. No, this isn’t safe. Quick returns are generally associated with higher risks. If you go this route, use hedges and stop losses.
