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There is a sense of uncertainty among investment professionals and investors. The recent fall in gold prices, the last safe haven of investors, is clearly an indication.
Global reasons such as Cyprus' possible sale of gold reserves or problems that continue to dog the PIGS (Portugal, Italy, Greece and Spain) economies are mainly responsible for the overall uncertainty. However, the domestic scenario is also not rosy. With the general elections just a year away, this could well be the 'year of the fence sitter'.
No wonder, then, that people such as Kartik Jhaveri, director of Transcend Consulting, feel the earlier the election, the better for the stock markets. "Once the event is over, markets would be able to take some direction," says Jhaveri.
According to Gaurav Mashruwala, a financial planner, there could be more gloom in the coming financial year. "There are phases when all asset classes fall for some time. We could be entering such a phase," he says. Data for this year, at least, supports Mashruwala.
From the beginning of the year, the equities market has fallen 3.6 per cent, gold has taken a serious body blow in the past week and is down 15.8 per cent, silver is down 21.3 per cent, prices in several pockets of real estate are slipping and interest rates are more likely to go down than up.
According to Mashruwala, such phases last for six to nine months or, sometimes, even longer periods.
In such a situation, an investor in 2013-14 might not feel too good about things around. Especially since this is the fifth year in a row when things in the economy or equities market have not been great. In such times, the investment strategy has to be simple: Just sit tight.
As financial planner Amar Pandit says, there needs to be a three-pronged strategy - keep liquidity, protect capital, and have some growth. Based on these three, investors should decide on their asset allocation. In fact, Pandit feels investors should not look at returns. "In such uncertain conditions, the primary objective should be capital protection, much like what is advised to investors close to retirement."
Debt
Obviously, Pandit's strategy includes good quality debt such as medium-and long-term gilt funds, which are returning around 11.6 per cent annually. Gilt funds are mutual funds that invest in medium and long-term government securities. They also have some exposure to top quality corporate debt.
He advises investing a 30-40 per cent of the debt portfolio in duration bond funds. These funds take advantage of the falling interest rates. For instance, if the yield on the bond is eight per cent and the duration of the fund is seven years, and assuming interest rates come down even by one per cent, it means a corresponding increase in the yield every year. This translates into eight per cent plus seven per cent (one per cent for each of the seven years), that is, 15 per cent return.
Jhaveri says with the nine per cent magic number (annual returns on fixed deposits) soon going to go away, if one wishes to get locked into debt, they should do so.
Equities
Even within equities, you cannot afford to be aggressive. Financial planners feel just continuing with your SIPs (systematic investment plans) is perhaps the best strategy.
While the valuations are indeed cheap, given the weak outlook on earnings growth, there is doubt if things would really turn around soon. However, Pandit says if there is a sharp correction of say, five-seven per cent over a week, one could invest some lump sum. "But invest-in-parts and not the entire surplus," he adds.
According to experts, there could be good opportunities in the mid-cap space. There are stocks in the mid-cap space which are down 40-50 per cent. However, entering the mid-cap space through mutual funds would be a better idea than venturing into stock selection.
Gold
The recent crash is perhaps good for investors who were going overboard on this asset class. "For portfolios overloaded with gold, it would be a good time to start reducing holdings," says Jhaveri, adding that as the dollar has been strengthening, the inverse correlation between the dollar and gold makes the outlook on the yellow metal weak.
However, don't rush to sell it immediately. Wait for the dust to settle. On Friday, gold prices went up by Rs 400, indicating that after the sharp fall, there will be some relief rally. If prices were to go up further, one could take a call on reducing their holdings, if you hold more than 10 per cent in gold in your portfolio.
Property
Perhaps, the most difficult call. If you want to invest in a property, one really does not know whether prices will continue to go up or fall if there is a slump. "Investors in commercial property would have found the rental income has actually fallen in the last five years," says Pandit.
There is even talks on fall in residential prices. Karvy Stock Broking recently came out with a report on the property exhibition in Mumbai on April 13, which said although builders were offering nominal discounts, footfalls seemed low; most of the counters were empty and it was largely brokers who were making enquiries. In addition, among the 175 projects that they sampled, only 12 per cent of the projects were new. "There are few opportunities for an end-user at such high prices that it creates an artificial demand-supply mismatch. This disappointment over successive years has led to an end user-realtor disengagement," said the report.
Jhaveri feels if one has the ability to invest in property, smaller towns could make more sense than bigger ones. "Bhopal would be much better than investing in Panvel (Navi Mumbai)," he says.
Amid all this uncertainty, Mashruwala puts things in perspective. "While it is natural for an individual to panic during such a time, I always advise one to stay away from any changes in any market, based on a single set of events that has occurred, or may occur, in the foreseeable future. An ideal strategy at this point of time is to look within, instead of outside. That is, look at your own financial goals and asset allocation, instead of looking at market conditions outside."
If only things were that simple.
