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Business News/ Opinion / Make consistent financial asset purchases this year

Make consistent financial asset purchases this year

2016 will be the year of accumulation. You might miss the bus if you don't accumulate persistently enough

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

In 2016, markets may not be easy, but it’s going to be another good year for investors to go on an asset accumulation drive. Every year-end, it’s worth every rupee to re-check your portfolio and investment strategy, and make course corrections, depending on market conditions. Financial markets do not always behave the way we want them to. But as Peter Lynch notably remarked, to make money, one doesn’t have to predict the market.

Looking back at 2015, regretfully or not, the market’s performance was a mixed bag. At the start of the year, there was optimism about the debt market. The conditions for a rate cut, such as lower inflation and current account deficit being under control, were largely in the making. And as expected, the Reserve Bank of India (RBI) cut the interest rate, in phases, by 125 basis points, bolstering the debt market. One basis point is one-hundredth of a percentage point.

On the equity front, my view has been that markets would remain volatile till the first rate hike in US is digested. At the same time, there was general caution about the rich valuations that equity markets then sported. Looking back, equities haven’t done too badly, but there have been spots of bother. In 2015, large-caps lost about 7%, while mid-caps gained about 7%. With the US Federal Reserve now reiterating its earlier stance that further rate hikes would be gradual, and an accommodative stance will be maintained, much of the negative overhang of a rate cut is now behind us.

There was also optimism around the domestic economy. It was expected to recover in 2015, given the better macro-economic conditions of controlled current account deficit and lower interest rates. But this didn’t quite turn out as anticipated. The recovery seems to be taking a bit longer, also because significant global challenges have arisen in the year gone by. Oil prices plunged; that led to shrinking demand and global growth rates. This had quite an impact on the domestic economy.

Indian corporate earnings recovery also did not take place as the lower prices led commodity companies into a downturn. However, lower prices drove an increase in consumption. Some parts of the market reaped the benefits of this consumption growth.

Year 2016 is expected to be another promising year for financial assets. Real interest rates are now high because of lower inflation; that should drive more investors to financial assets. Further, equity prices have slid low enough, and interest rates are expected to be softened by another 50-75 basis points in 2016. Nevertheless, some challenges persist. For a more meaningful and broad-based recovery in the domestic market, a sound revival in capital expenditure is a prerequisite. Rising consumption can only take the markets forward for a short duration. A longer-term sustainable earnings recovery has to be powered by a long-term revival in capital expenditure.

Globally, too, the challenges are not yet fully behind us. With the Fed having hiked interest rate, markets are now entering a new, and potentially interesting, phase. While the Indian markets will not be greatly affected thanks to strong macro-economic fundamentals, a slower-growing global economy would pose some challenges, often unanticipated.

Hence, an exceptional earnings recovery is not likely, particularly in the first half of 2016. But earnings growth has already been downgraded by analysts in the past year. This year, earnings growth could be driven by consumption sectors.

But the good thing is that India is expected to be one of the fastest-growing markets in the world—and that will be noticed by foreign investors. I expect gross domestic product (GDP) growing at 7.5% or thereabouts. The big themes that will be driving this growth would be urban consumption, government capital expenditure and investments. Also, fiscal deficit targets would be met.

A slow and gradual upswing in the Indian domestic market would make it a compounding market over the next three years. While equities have corrected, investors can look forward to better markets conditions. But watch out for volatility that can crop up frequently due to disparities in the world economy, and with the US economy strengthening and emerging markets slumping.

Overall, large-caps are undervalued and present an attractive opportunity. They have come under stress due to selling by foreign investors. At present, mid-caps are quoting at a price-to-earnings (P-E) ratio of 19.2 times, and large-caps at 16.9 times. The valuation gap between these two segments was the highest in the past year.

But valuations aside, investors should focus on getting the basics right in 2016. Some investors are, naturally, waiting for the market to fall further. But do remember that financial markets don’t always behave in the manner we want them to. Valuations are reasonably attractive; so continue to make financial investment purchases.

A strategy to use this year would be to invest in hybrid and balanced funds. The markets will tend to witness some volatility, driven by news, both external and domestic. Hybrid funds, on their part, often experience less choppiness as the debt portions limit the effect of serious equity gyrations.

Another game plan one should follow is: consistency. The benefit of returns in the long run are secured when you purchase at attractive prices. As you add more equity funds to your long-term portfolio, the compounding effect these can produce on the end results could be good. In fact, 2016 will be the year of accumulation. You might miss the bus if you don’t accumulate persistently enough.

Nimesh Shah, managing director and chief executive officer, ICICI Prudential Asset Management Co. Ltd.

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Published: 12 Jan 2016, 06:30 PM IST
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