Friday, August 9, 2013

Investing in Turbulent Times

Re-visiting the key events of last 2 months:
·         Rising Current Account Deficit in India thanks to high crude and gold imports accompanied by falling Indian exports
·         Possible tapering of Quantitative Easing (QE) by US Federal Reserve and as a result of that flight of capital from emerging markets towards US Treasuries
·         Announcement of quantitative easing by Bank of Japan on the same lines of US Federal Reserve to promote growth in the Japanese economy
·         Drastic depreciation of Indian Rupee by more than 12% due to concerns on the CAD front and reduced FII inflows. On Tuesday it hit the all time low of Rs61.79 against USD
·         Measures announced by Reserve Bank of India to strengthen Indian Rupee which indirectly increased the short term interest rates in the economy

How the Markets reacted in India:
·         The Indian equity markets have been on a continuous downward spiral over the last 2 months.  In the last week of July, the Indian markets closed in the red for 8 continuous trading sessions
·         The Nifty has fallen from 6000 levels to 5500 over the last 1 month or so.  Banking stocks bore the brunt due to slowing economy and rising NPAs.  Bank Nifty has fallen more than 20% in the last 2 months and trading below 10000 levels today
·         Debt markets had also been very volatile thanks to ad-hoc and indirect interest rate hike by RBI 
·         Indian Government Bond yields have risen from 7.30% levels in June 2013 to 8.55% levels in August 2013.   The 130 bps rise in bond yields drove the prices down across the board resulting in mark to market losses for debt fund investors

Now the important question to be answered is how we go about investing in these turbulent times.  The questions in our mind are should we stop investing? Would the market ever recover?  Will I recover my investments? 

Definitely it is lot more challenging to invest in these difficult market conditions.  But always remember the famous words of Warren Buffet, “Be greedy when others are fearful”.  In these dark clouds, there is definitely a silver lining for investors.  The opportunities are available across the board in fixed income debt and equity investments.  Let’s look at fixed income investments first.

Fixed Income investments:

The interest rates have risen now and there is a sense of understanding in the Government and RBI that monetary policy actions like interest rate hikes alone would not help strengthen a currency beyond a point.  For a currency to strengthen, the fundamentals have to be sound. 

The short term rates have zoomed beyond 10% and any further rate interest rate hikes may be very measured in the near term. 

Therefore, these elevated interest rates in the economy, which in our opinion would be only for a shorter term of say 1-6 months, provides a good opportunity to lock in to fixed income investments like Bank Fixed Deposits, Fixed Maturity Plans (FMPs) and corporate deposits.  For people in the higher tax brackets, FMPs would be an ideal choice of investment considering the tax benefits it provides compared to fixed deposits. Be careful though in choosing the right FMP as the credit quality is very important.
For aggressive investors who are willing to take some risks, they make take some staggered exposure in debt mutual fund over the next 6 months. 

Equity Investments:

Broadly speaking, the markets have corrected by 7% over the last 2 months or so.  But if you we dig deeper in to the market fall, you will find that the index levels were maintained due to few select stocks holding ground.  Stocks like Hindustan Unilever, ITC, Reliance, TCS and Infosys have held on well in this downward movement and thereby not letting the index levels fall below 5650 levels. 
But if you exclude them and see rest of the market, you will understand that the corrections have been sharp. 

It is possibly a right time for somebody to take fresh exposure to Indian equities as an asset class.  For investors who have already invested in the market, we suggest to hold on to their investments and when the tide turns, you will make handsome returns.  If you can afford, you may please add up to your positions in a staggered manner over the next 6 months. 
SIPs in established and well run mutual funds are our preferred choice of investment in respect of equities. 

Please write back to us if you would like to know more about any of the investment opportunities discussed above.  We remain at your service.  Happy Investing! 

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