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Business News/ Opinion / Consistency in investing is the key for next 1-3 years

Consistency in investing is the key for next 1-3 years

he reforms and rate cuts of the recent past in India have still to take root

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

Howard Marks of Oaktree Capital has a good analogy for the economy and markets. With the pendulum at the negative extreme, it can be counted on, at some point, to turn for the better, passing the mid-point and swinging toward the positive part of its arc. In the Indian context, we are at the mid-point of this cycle.

Passing through mid-points can be challenging for any economy. The reforms and rate cuts of the recent past in India have still to take root. This transitioning implies that the recovery could be slow and gradual. As a result, we could see some choppiness and anguish in equity; a stage where it will not be easy for short-term investors and traders. The economic pendulum is somewhere in the middle now, and it will require some effort to move to the positive side of the arc.

The market’s pendulum, however, has pulled back near the middle from being in a rich valuation zone about six months ago. In the short term, multiple challenges trouble the markets.

For one, there’s a possibility that the US Federal Reserve could hike interest rates in December, which could be a source of further volatility and confusion.

Second, earnings season has been a dampener by turning out much worse than anticipated, particularly in the capital goods space. This suggests that the investment cycle, which was expected to show signs of green shoots by now, will take longer to turn around.

However, as the market’s pendulum has swung to a fairly valued range, and in the favour of investors, it’s time to accumulate once again. Exciting times could unfold for people ready to put money into equities.

To be sure, we are moving into a moderate return phase for equities in the next one year. But consistency is the key to long-term investing success. A well-rounded portfolio is not built in a day. Investors have to constantly buy into the markets whenever there is an opportunity, and the opportunities come when markets either move sideways or correct.

The fundamental outlook, domestically, is still good. Indian companies, however, need time to iron out issues of deleveraging and low capacity-utilisation. This could take two-three years. Once the re-leveraging cycle begins, as it is expected to, beneficiaries would be investors who bought during the mid-point of this market cycle.

Mutual fund investors have been investing in the markets. Equity-oriented asset allocation products and systematic investment plans are seeing good inflows. Monthly investible amounts are being topped up. The good thing is that investors now know the advantages of buying during the good and the not-so-good times, particularly the latter.

Foreign investors have been selling except during the last month when we saw inflows, but that’s not worrisome. For investors who are showing investing consistency, the twin advantage is that not only is a transfer of assets taking place to their portfolios, it’s taking place at good prices. It will be worrisome if Indian investors don’t grab this opportunity. History has proved that it’s profitable to buy when foreign investors are selling.

Cyclical sectors tend to gain the most in a rebound. Financial services, oil and gas, metals, capital goods, utilities and telecoms are well-placed in the growth cycle. Greater capacity utilisation and rising operating leverage could result in higher growth rates for these sectors.

Defensive sectors, such as pharma, have corrected recently; hence, stocks across the board here are not overvalued. Technology is reasonably valued as well, but the growth outlook for some companies is deteriorating.

Large-caps are better placed than mid-caps. Lately, foreign investors have been pressing the sell button primarily in large-caps, particularly in economy-sensitive companies, which people were counting on for a rapid recovery. That has made large-caps more attractive than mid-caps, where prices have recently risen high.

There are a few key strategies, which if one gets right, can turn into big wins in the long run. It’s worth reiterating that assets may remain listless as developments, both domestic and international, affect sentiments in the short run.

The first key, and one of the biggest, is to overcome the momentary pessimism that can afflict any of us, and be consistent with making investments over the next one year.

The second key is to just grab the opportunity that volatility brings. Prices tend to react adversely to any negative news. These are bargain moments. It’s like buying good assets at a discount sale. Top up investments in equity funds or add lumpsums at good prices. If one is like everyone else buying only when prices go up, chances are you are missing out on taking advantage of important moments in the market.

At present, physical assets are inferior cousins of financial assets. Property across the country has given poor returns. Gold is at a multi-year low in dollar terms. Financial assets can give decent returns in coming years, and we expect to see further inflows into mutual funds as investors prefer financial assets over physical ones.

Therefore, in the present environment, to invest with a near-term view of one-three years, the hybrid and asset allocation funds such as balanced funds, balanced advantage funds and equity income funds present a better opportunity. With a longer view of three years and more, pure equity funds with a large-cap bias present a good opportunity.

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

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Published: 26 Nov 2015, 07:50 PM IST
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