Go for long term capital appreciation - Gagan Randev
Srujani Panda / 16 Dec 2011
The year 2011 has been a year of correction for the Indian equity markets. The key indices witnessed negative returns in the first three quarters of the current year, and have fallen close to 19 per cent YTD. The Euro zone’s uncertainty around the sovereign debt has created strong headwinds for emerging markets’ equities, but correction has given way to cheaper valuations, and one may start investing slowly at the current point of time.
Higher inflation is another major concern. The RBI has been raising the key rates for the past few quarters in a bid to tame high inflation. As per the central bank, the inflation trajectory indicates that the rate of inflation will begin falling in December 2011, and will then continue down a steady path to seven per cent by March 2012. It is expected to moderate further in the first half of 2012-13. In our view, the interest rate is at its peak, and going forward, we could see a fall in rates. Therefore, we expect the markets to bottom out in the first quarter of 2012, and rise gradually afterwards. One may expect a healthy rise in the second half of 2012.
FIIs are considered to be major source of inflows for Indian equities, though domestic savings also play an important part. FIIs had poured funds into the markets all through 2010, but turned negative in 2011. They may have turned bearish in their view of stocks here for the short term, but their positive long-term view remains intact. Also, uncertainty in Europe has played its part in some profit-taking in emerging markets. Once the situation improves, the FIIs are expected to invest in Indian equities once again.
Currently, investors should adopt an accumulative approach, i.e. that of gradually buying fundamentally sound stocks with a consistent financial track record. In the current market scenario, investors should not expect to make quick money, but should think in terms of long-term gains. It is better not to track prices of invested stocks on a daily basis, and not to bother about short-term fluctuations. Investors should not panic in this situation, but should check the financial stability of the company. One should accumulate slowly, and invest in parts. The approach can be to invest in a staggered manner (25 per cent each month) over the next four to five months, so that one may benefit by averaging.
Old wisdom says that one should not put all the eggs in one basket. Similarly, in the given market situation, investors should look at diversifying their portfolio instead of being biased towards any single asset class. One may invest a part of the money in high-yielding NCDs of companies, a part in gold, while the balance can be invested in equity markets in a staggered manner. Thus, risk can be divided through a mix of debt, equity and gold.
New investors can definitely enter the markets at this point of time. However, it is advisable to take an informed view for investing in equities, and to go for long-term capital appreciation. New investors should not get perturbed by short-term fluctuations, but should use this to their benefit by acquiring stocks at lower prices. Gains may not happen in a short time as the macro situation improves slowly. Thus, taking a long-term view is more beneficial.
We expect that the following sectors will perform better in the next year -
FMCG: The FMCG sector offers the most defensive play in the current market scenario, as the consumption demand continues to be strong, irrespective of the interest rate cycle, and the domestic consumption story is still intact. The FMCG sector is expected to do well in the coming future. The timely arrival of the monsoons will play a vital role in the growth of FMCG stocks.
Pharmaceuticals: Emerging markets (EMs) offer an attractive opportunity, with an estimated growth of 14-17 per cent through 2013 versus three to four per cent for the developed markets (US, EU and Japan). Innovators are thus, actively looking to expand their presence in EMs, and are considering doing so through the inorganic (mergers and acquisitions) route. Pharma is considered to be a defensive sector, and some of the companies from this space have truly remained stable despite broader market correction.
Information Technology: The Information Technology (IT) sector is certainly not interest rate-sensitive, and therefore, is one of the sectors least affected by rate hikes. Also, since IT companies export software services and earn their revenues in dollars, the rupee’s depreciation is beneficial for their bottomline. However, the sector is facing various other challenges, viz. currency rate fluctuations, rising attrition levels, visa restrictions, competition from large global players and margin pressures.
Textiles: The textiles industry, which was in the doldrums for the past few years, is now coming into focus. The formerly lacklustre demand is now on a gradual rise. Looking at the growing demand, major industry players have set out on an expansion mode. If the rupee stabilises at the current depreciated levels, exports may get some boost
- Gagan Randev, CEO of Religare Securities
Higher inflation is another major concern. The RBI has been raising the key rates for the past few quarters in a bid to tame high inflation. As per the central bank, the inflation trajectory indicates that the rate of inflation will begin falling in December 2011, and will then continue down a steady path to seven per cent by March 2012. It is expected to moderate further in the first half of 2012-13. In our view, the interest rate is at its peak, and going forward, we could see a fall in rates. Therefore, we expect the markets to bottom out in the first quarter of 2012, and rise gradually afterwards. One may expect a healthy rise in the second half of 2012.
FIIs are considered to be major source of inflows for Indian equities, though domestic savings also play an important part. FIIs had poured funds into the markets all through 2010, but turned negative in 2011. They may have turned bearish in their view of stocks here for the short term, but their positive long-term view remains intact. Also, uncertainty in Europe has played its part in some profit-taking in emerging markets. Once the situation improves, the FIIs are expected to invest in Indian equities once again.
Currently, investors should adopt an accumulative approach, i.e. that of gradually buying fundamentally sound stocks with a consistent financial track record. In the current market scenario, investors should not expect to make quick money, but should think in terms of long-term gains. It is better not to track prices of invested stocks on a daily basis, and not to bother about short-term fluctuations. Investors should not panic in this situation, but should check the financial stability of the company. One should accumulate slowly, and invest in parts. The approach can be to invest in a staggered manner (25 per cent each month) over the next four to five months, so that one may benefit by averaging.
Old wisdom says that one should not put all the eggs in one basket. Similarly, in the given market situation, investors should look at diversifying their portfolio instead of being biased towards any single asset class. One may invest a part of the money in high-yielding NCDs of companies, a part in gold, while the balance can be invested in equity markets in a staggered manner. Thus, risk can be divided through a mix of debt, equity and gold.
New investors can definitely enter the markets at this point of time. However, it is advisable to take an informed view for investing in equities, and to go for long-term capital appreciation. New investors should not get perturbed by short-term fluctuations, but should use this to their benefit by acquiring stocks at lower prices. Gains may not happen in a short time as the macro situation improves slowly. Thus, taking a long-term view is more beneficial.
We expect that the following sectors will perform better in the next year -
FMCG: The FMCG sector offers the most defensive play in the current market scenario, as the consumption demand continues to be strong, irrespective of the interest rate cycle, and the domestic consumption story is still intact. The FMCG sector is expected to do well in the coming future. The timely arrival of the monsoons will play a vital role in the growth of FMCG stocks.
Pharmaceuticals: Emerging markets (EMs) offer an attractive opportunity, with an estimated growth of 14-17 per cent through 2013 versus three to four per cent for the developed markets (US, EU and Japan). Innovators are thus, actively looking to expand their presence in EMs, and are considering doing so through the inorganic (mergers and acquisitions) route. Pharma is considered to be a defensive sector, and some of the companies from this space have truly remained stable despite broader market correction.
Information Technology: The Information Technology (IT) sector is certainly not interest rate-sensitive, and therefore, is one of the sectors least affected by rate hikes. Also, since IT companies export software services and earn their revenues in dollars, the rupee’s depreciation is beneficial for their bottomline. However, the sector is facing various other challenges, viz. currency rate fluctuations, rising attrition levels, visa restrictions, competition from large global players and margin pressures.
Textiles: The textiles industry, which was in the doldrums for the past few years, is now coming into focus. The formerly lacklustre demand is now on a gradual rise. Looking at the growing demand, major industry players have set out on an expansion mode. If the rupee stabilises at the current depreciated levels, exports may get some boost
- Gagan Randev, CEO of Religare Securities
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