Quantitative easing in US and other developed countries has led to many global markets running ahead of its valuations and fundamentals. India being one of the favourite emerging economy among foreign portfolio investors, is no exception. We are currently a few notches below our all time highs, liquidity continues to pour in our economy, our interest rates have already peaked and globally the economic powerhouse is about to hike rates in the coming three quarters. What does this hold for Indian investors?
Backed by strong political uplift, our markets have rallied in the past 12 months to what is considered beyond what fundamentals allow. We are able to maintain current levels owing to continued FII confidence in the economy, good corporate performance and healthy reduction in fiscal and trade deficit thanks to better than expected tax numbers and lower oil import bill. However, the dynamics should soon change once US Fed decides to withdraw the stimulus and hikes rates from its near – to- zero interest rates. Once this happens, treasury would become more attractive to long term portfolio investors and would result in sell-offs in risk assets. India being one of emerging countries, would correct to a considerable extent due to heavy flight -to -safety. Hence we would recommend investors to avoid heavy exposure to mid- and smallcap stocks in this year and invest only in a diversified portfolio of equities, preferably largecaps and dividend yield stocks. Investors who lack the market expertise should invest in equities only through well rated diversified equity mutual funds.
stocks in this year and invest only in a diversified portfolio of equities, preferably largecaps and dividend yield stocks. Investors who lack the market expertise should invest in equities only through well rated diversified equity mutual funds.
Amidst the worries of rate hike in US and the lingering worries over Euro region due to financial crisis in Greek, there are high chances that flight- to –safety due to any strong market turbulence shall lead to spike in demand of gold over the year. Gold at around $1200/ounce or Rs 27000 / 10g in Indian markets is valued attractively for those who are looking at investments beyond 2 years as gold would only head north once there is any strong risk perceived in the market. One can also look to invest in Gold in staggered manner by investing through SIPs of gold funds. This way you shall build a gold portfolio without worrying about price fluctuations in the near term.
Amidst concerns over equities and other risky assets, the outlook for debt is unbeatably bright. Indian inflation / growth / forex dynamics are very much in place after both CPI and WPI falling consistently. Falling crude prices have also kept Indian Rupee valuation in check. Indian apex bank RBI has already started cutting interest rates and the rates are already cut twice to the extent of 50 basis points. Falling interest rates give a boost to the prices of bonds. The longer the duration of the bond, the greater the benefit. For instance, one of the best rated long term bond mutual fund – ‘ICICI Pru Long Term Fund’ has returned 18.9% in the last one year. That’s the effect falling interest rates have on bond prices. And we are not even 50% down the line and we see much more space for rate cuts. Hence, we would recommend investors that if they do not have enough exposure to debt, there cannot be a better time to build the same. Build a portfolio that is heavy on long term bond funds and somewhat on short term bond funds to give you regular income. Bonds are poised to be the investment of the year 2015.