RELATED ARTICLES |
It is possible that your investment horizon, too, has changed since the budget day afternoon and you may now want to take a re-look at different asset classes and reorient your investment strategy.
Within hours of the budget, most money managers and financial planners were no longer talking pessimistically about the stock market and companies' earnings outlook for the financial year 2010-11. They now want to take agro-commodities a bit more seriously and have found renewed interest in fixed return assets. What’s more, they want to give a chance even to real estate as an asset class.
That is not to suggest doomsayers have disappeared overnight. And in many cases, they do have strong enough reasons to fear that th-ings could go topsy-turvy. But then, you invest when you are positive about the future, and this budget gives you enough reasons to be positive about the year ahead.
Equities
Equities, for one, look a far better investment option after the budget. The finance minister’s ploy of pushing consumption to drive growth has a very bright chance of working out well. Banking reforms, higher spending in infrastructure and social sectors should all eventually lead to better bottom lines for companies in most sectors and, thus, better returns for investors.
There are concerns about a rise in inflation due to a hike in petroleum prices and the hike in the minimum alternate tax (MAT) affecting some companies, but then the positives weigh heavier for India Inc.
“We are positive about the medium to long term direction of the market, as India’s growth momentum increases and companies benefit from the higher demand for goods and services,” says managing director & chief investment officer (Asian equities) of Franklin Templeton Investments Sukumar Rajah. He says India’s growth potential warrants a valuation premium and the growing appetite for India and the large savings pool should provide liquidity support to the market.
Executive director of Morgan Stanley Private Wealth Management Amitava Neogi says the focus in 2010 should be on selecting stocks with high earnings growth potential.
According to him, some of the top investment themes for 2010 would be industrials, financials and energy stocks.
“Acceleration in industrial growth will help close the output gap faster than what is possibly in the price right now. This will help a new private capex cycle to start in 2010 and further boost performance of industrials,” he points out.
In the financial space, Neogi expects credit offtake to accelerate and net interest margins to rise. “This will help earnings. Banks will also be helped by a declining fiscal deficit, which will likely cap long-term bond yields.”
Prateek Agrawal, head of equities at Bharti AXA Investment Managers, also feels banking stands out among sectors that benefited the most from the budget. He expects infrastructure to benefit from higher availability of credit and on account of tax benefits on infrastructure bonds.
“In terms of earnings impact, we believe the overall impact of an increase in MAT and a reduction in surcharge will mostly cancel out each other and that would leave the earnings outlook almost unchanged,” he says.
Fixed return assets
On the fixed asset side, you can now expect to earn higher interest on your fixed deposits and debt funds in the next financial year. Government securities, too, offer a good investment opportunity over a one-year horizon. By spelling out the government borrowing programme, the finance minister has set the ball rolling for tightening of interest rates. Industry experts say interest rates are going to harden after the RBI tightens its monetary stance in April, albeit marginally.
“A 100 basis points hike in key rates is expected from the Reserve Bank of India and I don’t think rates will go up beyond that unless there are slippages in the proposed non-planned expenditure of the government,” says Abhijit Gulanikar, chief investment officer of SBI Life.
According to him, the 5-6 per cent yield curve will be realigned throughout next year and, hence, the impact will be minimal. Every debt scheme is positioned with different investment horizon and, hence, a marginal movement in interest rates does not affect returns significantly.
Last year, after the RBI lowered the key rates, banks were forced to slash lending as well as deposit rates. As a result, returns on various debt funds were lower.
Mumbai-based financial planner Gaurav Mashruwala suggests investors to go for the infrastructure bonds among fixed assets. “This also allows you to save up to Rs 6,000 in income tax outgo,” he points out. He says the money that one is going to save on income tax outgo should be used to first pay out any existing debt and then go for investment.
Mutual funds
Considering a better outlook for equities, is it advisable to take the mutual fund route to equities? “Yes and no,” says Dhirendra Kumar, CEO of mutual fund tracker Value Research.
“The equities outlook is better because the budget was not as bad as it was expected to be, not because of any big fundamental change. So if one wants to invest in equities, one should do so with a long-term horizon,” he suggests. “If one goes for mutual fund, one should go with diversified equity finds and avoid thematic or sectoral funds,” he says.
Mashruwala, too, feels the industry will take time to absorb the stimulus rollback and, thus, one should not expect huge returns on equities this year.
However, Amitava Neogi of Morgan Stanley Private Wealth Management likes select mid-caps. “The broader market is likely to generate faster earnings growth of around 25 per cent in 2010, trade at better valuations than the narrow market and could outperform the narrow market,” he argues.
So should it be fixed deposits, debt fund or equity funds?
“Interest rates will continue the northward trend, which will mean higher deposit rates, but also higher borrowing rates for consumers through this year. In this scenario I would choose fixed deposits or short-term funds rather than debt funds. But if the finance ministers bet on growth turns out right, which is quite likely, continued allocation to equity funds at this point, may be worthwhile,” says KVS Manian, group head of retail liabilities and branch banking at Kotak Mahindra Bank.
Kumar’s pick is fixed deposits, because the debt fund yield curve is set to go down. “If one wants to invest in debt fund, it should be short-term bond funds,” he alerts.
Commodities/gold
Commodities, especially agro-commodities, are likely to draw investor interest amid high supply-side inflation and the agriculture push in the budget.
“The budget seeks to tackle agricultural issues aggressively with a long-term view. Therefore, the thrust was on rural infrastructure, improving productivity and financial support to farmers. Also the rise in road transport allocation, nutrient-based fertiliser subsidy, more capital for rural banks, low-interest crop loans to farmers and focus on cold storage and warehousing are all positives for agri-commodities,” says Jayant Manglik, CEO of Religare Commodities.
Among specific products such as rice, pulses and jute should see a long-term impact in productivity because of steps announced in the budget. Precious metals, too, will be in focus in light of the import duty hike, which may lead to a rise in prices and put pressure on demand.
However, Manglik feels the changes in the duty structure are unlikely to have a huge impact on demand.
“Investors should continue to follow asset allocation principles and keep 10 per cent of their investible surplus in gold.”
Real estate
The budget didn’t have much for the real estate sector. In fact, the inclusion of renting immovable property under the service tax net will have a negative impact on the industry, especially commercial property. Similarly, the 1 per cent interest rate subvention is still available only for affordable housing.
But the outlook for the sector has improved as some of the extra money given in the hands of the middle class is likely to find ways to the real estate sector. This apart, there is minimum possibility of a huge hike in home loan rates. Even if they rise in the first half of the financial year, they should fall in the second half. “There may be some hardening in the rates in the first half of next year due to the higher supply on the back of government borrowing. Inflation will also be high during this period. But as inflation and government borrowing cool off in the second half, interest rates will soften too," says Sandesh Kirkire, chief executive officer of Kotak Mahindra Asset Management.
“With the GDP expected to grow at 9 per cent, enhanced living standard will turn consumers towards quality products and services,” says Pranab Datta, vice-chairman and managing director of Knight Frank India.
Bottom line
Despite the bullish outlook, Neogi of Morgan Stanley Private Wealth Management suggests investors with a moderate risk profile to have 45 per cent of assets in fixed income/cash equivalent (biased towards short and medium term instruments) and the balance 50 per cent in high quality equities. The rest 5 per cent should be in gold.
“Diversification, asset allocation and periodic rebalancing with disciplined profit booking and stop loss are must for profitable investments. Investors should focus on conservation of capital, absolute returns and liquidity,” he says.
(With inputs from Sneha Shah)
 Limited.JPG)
Post new comment