After a sharp fall in the month of October 2011 (-4.7%), the Index of Industrial Production (IIP) for the month of November 2011 rose sharply to 5.9%. Meanwhile, the IIP for the month of October 2011 has been revised to -4.7% from -5.1% (provisional estimate) provided earlier.

 

(Source: CSO, PersonalFN Research)

 

The sharp upswing in the IIP was led by the following:

 

• Manufacturing index, which constitutes about 76% of the industrial production, posted a positive growth of 6.2% in the month of November 2011 (as against -6.0% in the previous month).
   
• Consumer goods too posted a robust 13.1% in the month of November 2011 as against 0.2% in the previous month.
   
• Capital goods did well to post a negative growth of -4.5% from -26.5% in the previous month.
   

On the bold IIP numbers Planning Commission Deputy Chairman - Mr. Montek Singh Ahluwalia said, "Clearly, the industrial growth of almost 6 per cent is a good change... I think it hopefully indicates that the slowdown in industry will basically come to an end during the third quarter (October to December) of the financial year."

Also, Mr. C Rangarajan - Chairman of PMEAC said that the capital goods industry was still not showing signs of a good pick-up. However acknowledging that the November data showed an overall pick up, he said that the IIP numbers will see further improvement in FY-13.

 

Our View:

The bungee jumping shown by the IIP numbers in the past two months (October and November) of the year 2011 is mainly due to high base effect which is a statistical phenomenon. For instance the IIP number for the month October 2010 stood at 11.4% and for November 2010 stood at just 6.4%. This thus has a direct impact on the IIP numbers posted for the month of October 2011 and November 2011 (as the calculation is done on year-on-year basis). Similarly, the same principal applies for the other constituents of the IIP number like the manufacturing index, consumer goods index and the capital goods index.

The Indian economy is still reeling under the pressures of high costs of inputs and borrowing, and may take while for the situation to change (not an overnight phenomenon).

 

What should equity investors do?

The Indian equity markets are resilient in nature and have potential for a robust future growth. Investors in equity should adopt calm and compose approach and stay invested from a long term point of view.

However, as fears of downbeat economic data being disseminated from the Euro zone still remains, 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 should stay away from U.S. or Euro oriented offshore funds in such a scenario, and instead look at investing in domestic value style equity funds. Ideally you should 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.

 

What should debt investors do?

Well, we think that the current situation is attractive to take exposure to debt mutual fund instruments as interest rates are likely to consolidate at these higher levels before they start going down.

You can now gradually take exposure to pure income and short-term Government securities funds. Since longer tenor papers will become attractive, longer duration funds (preferably through dynamic bond / flexi-debt funds) can be also considered, if one has a longer investment horizon (of say 2 to 3 years). However, one may witness some volatility in the near term as there is always an interest rate risk associated with the longer maturity instruments.

With liquidity in the system being tight, yield on the short term instruments is expected to remain high thus making short-term papers attractive. Hence investors with a short-term time horizon (of less than 3 months) would be better-off investing in liquid funds for the next 1 month or liquid plus funds for next 3 to 6 months horizon. However, investors with a medium term investment horizon (of over 6 months), may allocate their investments to floating rate funds. Short term income funds should be held strictly with a 1 year time horizon.

Fixed Maturity Plans (FMPs) of 3 months to 1 year will yield appealing returns and can also be considered as an option to bank FDs only if you are willing to hold it till maturity, but you may not have a very attractive post tax benefit, as indexation benefit will not be available on FMPs maturing within 3 months. You can consider investing your money in Fixed Deposits (FDs) as well; at present 1 year FDs are offering interest in the range of 7.25% - 9.40% p.a.

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Comments
scrsngx@126.com Jan 19, 2012 Thanks for being on point and on target!
office@lotteraner.at Jan 19, 2012 I'll try to put this to good use immediately.
martin_kemp@banffcentre.ab.ca Jan 19, 2012 At last! Someone with real expertise gives us the answer. Thanks!

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