INVESTMENT DISCIPLINE AND STRATEGIES

[Dr. Sanjiv Agarwal]

2009 was a testing year for investors, more so in India. The year 2009 saw various asset classes clocking a whopping appreciation in the Indian markets. While equities shot up by an eye­-popping 75%, gold went up by 25% and real asset prices recovered smartly after a steep fall the commodities of every hue flared up. Yet it is ironical that 2009 will also be remembered as one of the most challenging years for asset managers and investors. Investors will recall that on May 18, 2009, in a single trading session, the equity indices gained as much as 20% when most fund managers were bracing for a sharp fall. In the midst of all the excitement though, the various asset classes clawed back to their mean-reversion levels and found a balance between the euphoric highs of early 2008 and the overly pessimistic lows of October 2008.

What is next? 2010 may be a year of consolidation. Against the above backdrop, the year 2010 is likely to be a less chaotic year. This year, generally, we may see the further asset building on the various classes smart recovery evident in 2009. This will be supported by renewed, strong economic growth, return of stability in the global financial markets, and improvement in consumer and business confidence. The government and the RBI policies can be expected to continue to be supportive to growth as Indian economy needs to be nurtured for the time bang. There may also be some acceleration in the process of economic reforms and liberalization as well with government pushing reforms and divestments process. With economic growth back on a high trajectory, there is likely to be renewed buoyancy in government revenues in the medium term. This, in turn, is bound to ease the fiscal deficit situation and pressure of government borrowings, and lead to a favorable investment climate-moderate inflation, reasonable interest rates and abundant liquidity. The GDP growth is poised to register a significant rebound in Fiscal 2011, powered by strong recovery in industry and services segments. In the medium term, real GDP growth is expected to get back to (and sustain at) the 8-9 %-per­ annum level. However, inflation will be a worrying factor.

In such a scenario, disciplined approach will hold the key to gains. India is truly a long-term, secular, high-growth story with few parallels. As India, along with China, emerges as the new engine of global economic growth, there will be profitable investment opportunities across asset classes. The way for investors to benefit from the India growth story is to invest for the long term without being carried away by the short-term momentum. However, investors tend to repeat their mistakes as those who sold their assets in late 2008 may be regretting now. The learning, therefore, is that the investment horizon should leave sufficient time for investment themes to play out and yield the desired results. Also, the happenings of 2008 and 2009 also underline the significance of investment discipline. An disciplined investor will never loose in long run.

Having known the importance of investment discipline, let us look up some investment strategies. Since growth is the main driver, risk capital or equity investments is likely to be the best performing asset group in the medium to long term. Robust economic growth is expected to support sustained, strong corporate earnings growth over the next 2-3 years. The resilience shown by the Indian economy in the global economic downturn of last year will further improve the attractiveness of Indian equities. The emergence of India as a global economic power will become increasingly apparent, and this will support a sustained uptrend in equities.

Gold is on track to register further gains in 2010, mainly on the back of a persistent, structural dollar weakness. The greenback is likely to be weighed down by the excess supply of the currency in the system and, after the ongoing technical bounce, the dollar weakness is likely to resume and gather momentum in 2010. The US dollar as a currency is likely to lose more sheen, and, therefore, gold is expected to be sought after by central banks the world over. Although the pace of rise in gold may slow down, it is expected to continue to be an out performer. The investment in Gold ETFs (GETFs) offers an undiluted play on gold as an asset class. Mutual fund schemes which invest in gold-mining stocks are also good proxies for exposure to gold.

Global mining companies stocks also look attractive the material intensive economies of India and China may propel growth in demand for metals and minerals. This may be supported by the recovery in the developed economies. On the other hand, there may be severe supply constraints for many industrial commodities due to the severe cutbacks in investment spending during the economic meltdown of the last 18 months.

Indian real estate is likely to be a winner asset class in 2010. The renewed economic growth should provide a strong fillip to demand for commercial and residential properties and will drive the uptrend in real estate prices. It is expected that demand for residential properties to be particularly strong due to the growth in income levels and the growing aspiration needs of the urban Indian. A real estate venture fund is the recommended vehicle to take exposure to this asset class.

Income funds (debt) is our somewhat contrarian choice for 2010. It is believed that the worries of quantitative tightening by the RBI, in a bid to curb inflation, are overdone. It is not expected that RBI will take any steps that will thwart the recovery in industrial and GDP growth seen in recent months. A continued pro-growth stance by the RBI (which is indeed our expectations) in the coming weeks may result in a rebound in the government bond prices. Also, yields coming off in corporate bonds as the economy recovers and worries of default and downgrading of corporate bonds recede. All these likely developments support investment in income funds.

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