Mumbai: After three years of growth, most assets classes posted losses for Indian investors in 2008. And 2009 is unlikely to be better, except perhaps for some long-term investments, according to many wealth advisers.
In 2008, Sensex, the benchmark index of Bombay Stock Exchange (BSE), yielded its worst returns in the 17 years since India’s economy was liberalized in 1991, after at least a 40% return the past three years.
Only gold, and some debt funds, provided positive returns as broad asset classes, while others, particularly equity, commodities and foreign exchange, lost money for many investors.
The year “2008 has been a washout for all assets”, sums up Ramachandran Krishnan, head of investments at Barclays Wealth India, the domestic wealth management arm of Barclays Bank Plc.
An investment of Rs100 in a fund that tracks the Sensex at the beginning of 2008 would have left an investor with just Rs47.17 by now. Similarly, Rs100 invested in a commodity index, such as the Multi Commodity Exchange of India’s Comdex, would have shrunk by now to Rs68.23.
The price of gold fluctuated throughout the year, but it would have left an investor with Rs123.58 if he put in Rs100 at the start of the year.
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Debt funds, broadly classified as income and gilt funds (calculated here as the average of the top three and bottom three returns in this asset class) would have yielded Rs105.04 and Rs113.36, respectively, for the Rs100 invested, as the Reserve Bank of India started cutting interest rates to tackle the credit crunch.
Krishnan expects 2009 to be challenging as well, and doesn’t see any asset class performing extraordinarily, even though the Sensex’s price-to-earnings ratio, a measure of how expensive a stock in the index is, has now halved to 12.25 from 27.67 at the beginning of 2008.
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“There could be a lot of volatility and returns are going to be fairly ranged. I don’t see any trend (of one particular asset class doing well) likely to be established,” he said.
That sentiment was echoed by retail investor Irfan Danawala, owner of Mumbai-based web development company, webchillies.com, who lost some 70% of his equity portfolio this year. “In 2009, I’m just going to wait and watch,” says Danawala. “Whether it’s equity or any other asset class, it’s a strict no-no for a while...at least till the elections are over.” National elections are due before May.
Still, valuations of many Indian stocks, including some blue chips, are now down to levels one may not see in 5-10 years, claim some wealth advisers. “In equities, I don’t see too much of a downside from here,” insists Karthik Jhaveri, director of wealth advisory firm, Transcend Consulting India Pvt. Ltd. “There might be basic inaction and no performance, but if equity rallies for two weeks, then it can potentially give you returns that a debt instrument can give you the whole of the year.”
Rajesh Saluja, chief executive and managing partner of Mumbai-based ASK Wealth Advisors Pvt. Ltd, warns that Indian stock markets will continue to be volatile over the next six months though he says it will be a great time to build a long-term portfolio.
To be sure, most wealth advisers add a caveat, saying equity performance will continue to be linked largely to increased capital flows from overseas, which is dependent on a bounce back in the US economy. Foreign institutional investors, or FIIs, key drivers of the Indian stock market, pulled out at least $13 billion in 2008 in the wake of the global credit crunch.
For debt, given a softening interest rate scenario, there might be further opportunities in the next two to six months, especially in debt funds that have longer-term paper.
As interest rates go down, the price of the paper in which these funds invest goes up, resulting in higher net asset value for the fund. The longer the tenure of the paper, the higher the returns.
“Investors should, however, watch out for the credit quality of these papers,” said Saluja of ASK. “In gilt funds, too, some of the play is already over, but the lower credit risk makes it a good investment opportunity over the next two months.”
A natural corollary of softening interest rates is that banks are likely to lower fixed deposit rates in the next two months. Besides, as Jhaveri of Transcend explains, liquid funds, a type of debt fund that investors use to park surpluses and from which they can withdraw at will, are more tax efficient than fixed deposits.
All the wealth advisers Mint spoke to also said the rise of the dollar in recent months was an aberration waiting to be corrected. So, they warn, betting on the dollar may not be the best way forward in 2009. “When an economy is in recession (referring to the US), it can never happen that the currency of that country will appreciate. The rupee will appreciate back to the 40s and maybe even the late 30s (against the US dollar),” predicts Saluja.
Dollar depreciation, however, may throw up another opportunity. The price of gold, which has an inverse relationship with the world’s reserve currency and is used for hedging, could go up over the next year or two.
“From a long-term perspective, gold has never delivered returns that beat equity. But, given the expected depreciation of the dollar, it is an opportunity for the next one or two years,” Saluja said.
Other commodities, meanwhile, are not likely to go anywhere from here. “Crude and metals are here to settle for a while. There isn’t too much of a market for them over the next year,” said Jhaveri.
In real estate, Jhaveri predicts inactivity for some time, but says it’s the right time to start fishing.
“You don’t exactly go down and close the deal, but you might want to get a loan sanctioned for an opportunity that may come up in the next six months,” he said. “This is especially so for new properties, where many developers are in a cash squeeze, and you might find lower prices by the middle or end of 2009.”