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Business News/ Opinion / Online-views/  Stick to time-tested investment strategies in 2013
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Stick to time-tested investment strategies in 2013

If you feel that interest rates will soften this year, go long on duration strategies in bonds.

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

The year 2013, the year that was not to be—if we were to believe our Mayan mates—looks much more promising than the same time last year. A series of concerns including global growth, the euro zone, fiscal imbalance, inflation and resultant high interest rates had dragged expectations early on in 2012. Yet, against most odds, 2012 closed on an optimistic note. Will the New Year ride on tailwinds from late 2012 and build further or will economic headwinds crush any such optimism? 2013 may be quite unique: there will be opportunity in both prominent asset classes—equities and fixed income.

Equities

Equities were robust in 2012, with the Sensex posting 25% returns. Unfortunately though, few foresaw such a rebound. Even though conventional investment wisdom continues to suggest that we buy equities at relatively cheap valuations, our actions much-too-often run counter. This continued to be the case in 2012, where retail investors sold equities when markets spiked up, often to redeem existing holdings that were breaking even.

As we head into 2013, we may still have a window of opportunity to build exposure to Indian equities. Towards the end of 2012, global tail risks and perceived uncertainties began to subside, increasing global investors’ risk appetite. Dollars poured into equities in emerging economies. Traditionally, India has been a key beneficiary of such flows and recent data validates such a trend.

Global investors are also drawing comfort from the fact that the Reserve Bank of India (RBI) is likely to support growth this year with an accommodative monetary policy, unless persistent, sticky inflation plays spoilsport. A reduction in interest rates, policy action and expectations of improving local macroeconomic indicators further supports the case for Indian equities in 2013. There may well be short-term concerns around relative valuations, but it’s important to note that Indian equity indices have habitually traded at a premium to many Asian counterparts, and few have withstood the impact of a global liquidity driven rally.

Fixed income

The not-as-glamorous counterpart to equities as an asset class, the fixed-income category, too, had an admirable 2012. Most gilt and income funds with exposure to long-term securities posted double digit returns. A fair number of liquid and liquid-plus funds, too, posted returns above 9% for the calendar year 2012.

The New Year is likely to be a déjà vu, if not better, for bond investors, assisted by declining interest rates as RBI signals rate cuts over the year.

A diminishing interest rates scenario bodes well for long-term bonds, notably sovereign government of India securities (G-secs). We saw a hint of this at the close of 2012 and in early 2013 already, where yields on benchmark 10-year G-secs fell from about 8.2% in December to about 7.9% in early January. As the yield on 10-year G-secs falls, yields on corporate bonds—particularly the AAA-rated category—may fall in tandem as the relative attractiveness of top rated corporate bonds flocks investors towards them, resulting in price gains for AAAs as well. We then have a unique opportunity yet again to gain from long-term bonds—be it sovereign or corporate. It’s important to note that long-term bonds can be accompanied by bouts of volatility, though for many investors, it’s the destination that really matters and not the journey as much.

Gold

The obsession of Indian investors, gold continued to glitter in 2012 posting about 12% returns, driven by a flight to safety, global monetary easing and a weakening rupee. However, in 2013 we expect gold to moderate its recent pace of returns. Reduced global uncertainty coupled with liquidity and diversion of flows to return generating assets such as equities are likely to weigh down on gold.

What should you do?

In summary, the year may be new, but it’s best to stick to the old, tested investment norms in 2013. Despite the high risk of oversimplification, here is a quick strategy checklist:

* If you agree that global investor risk appetite is returning, go overweight on equities.

* If you agree that interest rates will start a downward trend sometime in 2013, go long on duration strategies in bonds.

* If inflation falls, start switching out from gold.

The 2012 was an opportunity foregone for some, while the end-of-the-world for others. On the face of it, 2013 seems a promise for all.

Vishal Kapoor is general manager (wealth management), India and South Asia, Standard Chartered Bank.

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Published: 14 Jan 2013, 08:00 PM IST
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