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Business News/ Opinion / Online-views/  Investing in 2013? Risks that could trip you up

Investing in 2013? Risks that could trip you up

The biggest risk for equities is FII flows. If other markets start to do well then money can shift


The start of the New Year is your opportunity to review your investment portfolio and also reset return expectations. At this time, many experts also review their asset return expectations. Which means, by now you would have read on many platforms, the expected return from equity, bonds, gold and other assets in 2013.

But you know that return is only half of the equation. You need to be mindful of risks too. What are the potential events or outcomes that could put a cap on your expected return? At Mint Money we spoke to experts about risks to watch out for in four main asset classes. The biggest risk overall is economic slowdown which really changes investment demand, but there are other factors too.


Despite the risks spelt out many times in 2012 and investors choosing to stay away, equity markets ended with gains of 27% in the last calendar year. Now that benchmark S&P CNX Nifty has crossed the technically prominent 6,000 level, some experts are expecting another 10-15% gains this year; it’s time for you to be aware of the risks in the near term. In the short to medium term, there are two thing that drive equities, earnings and liquidity. The liquidity risk is perceived to be low as globally most economies are in an easing cycle. However, there is no writing in stone that foreign institutional investor (FII) money will continue to flow. According to Gaurang Shah, assistant vice-president, Geojit BNP Paribas Financial Services Ltd, “The biggest risk is FII flows turning around, they have been robust so far but if other markets start to do well then money can shift."

Agrees Mahesh Patil, co-chief investment officer, Birla Sun Life Asset Management Co. Ltd, “On the global front, the development in the euro area will play an important role as it has implications on capital flows and global risk appetite." On the earnings front, by and large, a poor show in FY13 has been discounted but you could have some surprises. Shah says, “Earnings from sectors such as real estate, infrastructure and aviation are likely to be disappointing." However, he added that in general they are expecting markets to move up this year and the first half of 2013 is likely to see gains on the back of some positive events. But here too, the risk of execution remains. Says Patil, “The Union budget and its focus in addressing the fiscal consolidation has to be watched; any measure that is populist in nature without increasing productivity would be seen as a risk."

You should also watch out for an expected repo rate cut from the January 2013 monetary policy review; experts say if that were not to happen, markets may react for one or two sessions and get back on track.

Fixed Income

While your fixed-income fund returns look good for 2012, they may look even better this year. The bond rally has picked up steam in the New Year with benchmark 10-year government security yield falling below 8%. Expectations of monetary easing in January are driving the market. This comes on the back of core inflation trending lower and economic growth slowing down to an uncomfortable level. What if easing expectations are not fulfilled? According to Arvind Chari, senior fund manager (fixed income), Quantum Asset Management Co. Pvt. Ltd, “One big risk for the market is if WPI (Wholesale Price Index) inflation remains sticky around 6.5-7% and core inflation remains above 4% in 2013. It would be difficult for RBI (Reserve Bank of India) to cut rates by more than 50 basis points during the year. This attains significance when seen in the context of the quantum/amount of rate cuts expected in 2013."

The other aspect you need to keep an eye on is supply of government bonds. If this is more than expected, yields may not move lower as expected. Incremental supply will depend on how the government manages the fiscal deficit. Typically, bulk of the borrowing by the government happens in the first half of the year. While most experts are not expecting any surprises here, if borrowing needs to be increased then yield may move higher in the first few months of FY14. Santosh Kamath, chief investment officer-fixed income, Franklin Templeton Investments, “While most market participants expect some fiscal slippage to occur, a larger-than-expected margin of slippage and higher government bond supply will impact sentiment." This risk can get magnified if RBI rate cuts don’t happen as expected and the bond market doesn’t get support from RBI’s open market operations (buying back bonds).

Real estate

Your real estate investment may not have seen a sharp appreciation last year. Selectively, residential real estate prices have risen, but by and large sales volume has dipped and price increase in metro cities has been subdued. Given the slower sales volume and high cost of borrowing, availability of funds for developers has worsened. As a result another roadblock is the time taken to complete projects and deliver to buyers which has increased. This is essentially the execution risk for developers. Says Akash Deep Jyoti, senior vice-president-ratings, CARE Ltd, “Execution risk or the ability of a developer to deliver a finished product on time will depend on the access to liquidity. On the whole, both economic growth and sentiment impacts liquidity flow to the sector."

The pick-up in economic growth is integral to the future of this sector. Economic growth increases the productivity and earning of the population and hence, lends to the growth in real estate sector as well. So if growth fails to pick up, matters could worsen in this segment. However, as was the case last year, select developers across the country did launch and complete projects successfully. Jyoti says, “If a developer has a strong brand, good financials, location and execution capability, the industry risk can get offset." In 2013 as well, real estate investment is likely to remain more project-specific than based on geography. As investors it is crucial to check specific project details carefully before committing to any location.

High home loan rates also matter, but by and large it’s high prices coupled with execution risk which will impact your investment decision.


Gold has had a fantastic rally in the last 10-15 years; you could have earned at a compounded annual growth rate of around 12.5%. Sovereign demand for gold has also been on the rise in the last couple of years. However, after rallying 32% in 2011, domestic gold prices took a break in 2012 with gains of only around 12%. This was mostly a result of money shifting to risk assets rather than looking for an inflation hedge, and also in India demand fell thanks to high domestic prices on account of a weak Indian rupee (against the dollar). Market watchers say that there is still steam left in the precious metal as global uncertainty is yet to be resolved and that will keep demand up. According to Priti Gupta, executive director–commodities and currencies, Anand Rathi Financial Services Ltd, “The biggest positive trigger for gold and silver will be ultra-accommodative policy stance that would remain in place in the US, along with the possibility of stimulus being introduced in China and euro zone. Also, economies around the world will convert a higher ratio of their reserves into gold."

However, she also says that the volatility in gold prices is expected to continue more so on the domestic front. If the weakness in Indian demand doesn’t pick up, the upside in gold prices may be restricted. One also has to consider the government’s attempt at decreasing import of gold by increasing the duty. Says Nalini Rao, senior research analyst, international commodities and currencies, Angel Commodities Broking Pvt. Ltd, “As the import prices rise, demand might be discouraged gradually, thereby causing the prices of gold to reduce in the medium term." Moreover, if the global economic crisis deepens then the US dollar may pick up strength thereby keeping gold prices at bay. Rao agrees that if economic recovery concerns persist, that can add pressure on gold prices in the near term but in the long term, preference for gold as a safe haven asset will take over. The bigger risk she says is if European Central Bank cuts interest rates, whereby strength in the dollar index may exert downside pressure on the gold prices.

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Published: 13 Jan 2013, 08:25 PM IST
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