India’s economic growth for the second quarter of the fiscal year 2011-12 slumped to 2-year low of 6.9% (from 7.7% clocked in the previous quarter of the fiscal year).

 

(Source: CSO, PersonalFN Research)

Weakness in the second quarter was broad-based, with manufacturing growing at only 2.7% (against 7.2% clocked in the previous quarter), farm output expanding by only 3.2% (against 3.9% clocked in the previous quarter) and mining contracting to 2.9%.

 

Our View:

We believe that the Indian economy has undergone a confluence of factors in the last one year. Primarily WPI inflation has remained sticky and above the comfort levels of the Reserve Bank of India (RBI), which in turn has resulted in them adopting anti-inflationary stance in the monetary policy. Cost of funds too have gone up due to 13 successive policy rate hikes brought in by the central bank (to tame inflation) which in turn has weighed heavily on the economic growth rate.

Going forward we believe that Index of Industrial Production (IIP) numbers would have to watched carefully to take cue of the momentum in economic growth rate. But having said that, we are of the view that as long as our economic growth rate is +6.5% year-on-year on an average, there is not much to worry as it would entice Foreign Institutional Investors (FIIs) to look at India (amongst the other emerging market economies); in a situation where economic growth rate clocked by the developed economies is dismal.

Speaking about RBI future monetary policy stance (in the third quarter mid-review of Monetary Policy 2011-12), we believe that they would refrain from increasing policy rates once again, looking at the Q2FY12 GDP growth rate. Also going forward, WPI inflation data which have been on the radar of the central bank (to draw its monetary policy), is expected to mellow given the fact that above normal monsoon have aided to push food inflation below the double-digit terrain.

 

What should equity investors do?

As mentioned earlier, that as long as our economic growth rate is +6.5% year-on-year on an average, there is not much to worry as it would entice Foreign Institutional Investors (FIIs) to look at India as attractive investment destination in a scenario where the developed economies are clocking dismal economic growth rate. Moreover prudent policy measures, lower debt to GDP ratio and strong consumption theme are supportive factors for us to meet such expectations.

Yes, in the near term the news disseminating from the developed economies - especially Euro zone and the U.S. may show a rippling and crippling effect on the Indian economy and its equity markets. But we believe that one needs show patience and perseverance in such times and stay invested for the long-term, and also invest further as soon as valuations look attractive.

Hence one needs to be cautious while investing in equities and rather have a staggered approach.

For investing in equities we think diversification benefit provided by mutual funds can help to reduce risk (however one needs to stay away from U.S. or Euro oriented offshore funds in such a scenario). While investing in equity mutual funds we recommend that you opt for value styled funds and adopt 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.

We recommend investors to take gradual 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 considered, provided one has a longer investment horizon (of say 2 to 3 years). Short term income funds should be held strictly with a 1 year time horizon. Fixed Maturity Plans (FMPs) of 3 months to 1 year 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 5 months. One may also consider investing their money in Fixed Deposits (FDs). At present 1-yr FDs are offering interest in the range of 7.25% - 9.40% p.a.

 

What should investors in gold do?

In our view the downbeat global economic headwinds make the case for gold becoming bolder. Moreover mellowing economic growth rate posted by most economies across the world would encourage smart investors to take refuge under the precious metal. It is noteworthy that gold has displayed a secular uptrend since a long time now. In 1971, the price of gold was about $32 an ounce and today (i.e. on November 25, 2011) it is $1,688.5 an ounce - which indicates that price of gold has gone up by 52 times over the last 40 years.

Hence, nothing has changed for gold and we believe it will continue to maintain its upward trend in the long-term. Moreover, with the present festive demand and marriage season, the precious yellow metal is bound to accelerate its further. At PersonalFN, we recommend that you should have a minimum of 5% - 10% allocation to gold, and invest it with a long-term time horizon of 10 to 20 years.

 

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pj_jordan@msn.com Dec 17, 2011 I love these articles. How many words can a wordsmith smith?
l1hz69603@gmail.com Jan 07, 2015 Taking the overview, this post is first class

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