)
2013 started on a positive note led by optimism around aversion of the fiscal cliff in the US, strong economic data from China and rate cut by the Reserve Bank of India (RBI). However, gains were erased later in the quarter mainly due to a disappointing Union budget that lacked significant proposals to boost investor confidence. Withdrawal of support by a key ally of the central government also weighed down investor sentiments as it raised concerns over the government's ability to push through reforms and boost growth. CNX Nifty fell around 4% in the quarter ended March 2013. Though the RBI cut its key policy (repo) rate in March and May, its statement that room for further cuts is limited, impacted the market.
India’s GDP expanded by 5% in 2012-13, its slowest pace in a decade. Poor performance of the economy is the reason for low business confidence, slumping investment, high inflation and weak export demand from Western countries. Such disappointing performance ahead of national elections scheduled for next year is a good sign neither for the UPA government nor for the country.
Downward trend of India’s GDP
The Indian market was also affected by weak overseas cues primarily in the form of escalating debt crisis in the Euro zone due to rating downgrades for Italy and Cyprus. Losses were capped on rate cuts by the RBI and continued foreign institutional investor (FII) buying. FII’s were net buyers of equities worth Rs 545 bn in the quarter ended March 2013 compared to net buying of Rs 455 bn in the previous quarter.
Sectoral Performances Vs Nifty
Most sectoral indices ended lower, except CNX IT and CNX FMCG, in the quarter. CNX IT Index was the top gainer, up 20%, as IT shares gained on optimism over revival of growth in the US - the biggest export market for the sector, and some positive corporate news from the sector. CNX FMCG rose 1% as investors preferred to take defensive bets. Meanwhile, CNX Metal emerged as the biggest loser among all the indices analysed, down 23%, following weakness in global metal prices and poor Q3FY13 earnings of index heavyweights. CNX Realty ended 20% lower as sentiments were impacted by dipping demand and hawkish monetary policy statements by the RBI.
Current concerns affecting Indian equity markets
• Fear of a scaling back of quantitative easing in the US. This could impact flows from FIIs, which have invested $15.3bn in Indian equities market so far in 2013
• Harsh loan recast rules for Indian banks
• Weakening of rupee to 56.51 on 31st May, 2013 (lowest since 28thJune, 2012) against dollar
• RBI’s concern on the high current account deficit (CAD) has hurt market sentiment
• Despite lower inflation, rate cut seems difficult due to high CAD
• No new reforms expected in current political situation and national elections expected early next year
• Delays in sorting out regulatory hurdles with respect to mining activities in India
Silver lining that could revive sentiment of Indian equity markets
• Policy action by the government to reduce bottlenecks in construction and infrastructure sectors
• Policies to promote FII investments in India
• Key rate cuts by RBI and banks passing the benefits to companies by reducing lending rates
• Positive global economic cues from US, China and Eurozone will be triggers for upside in equity markets
• Cooling off in commodity prices and expectation it remains soft for the year
• Normal monsoon forecast for the year
Investment in Sectors That Should Work in a Rate Cutting Cycle
Metals: Demand for metals increase since companies execute Capex plans when rate cuts are passed on to companies across the sectors by banks. Companies with high interest costs see some relief on the profit and loss statements due to lower interest charges.
Automobiles: Auto loans will be available at lower interest costs and EMI’s by banks will be lower compared to now. So, we can expect some pickup in demand for automobile sales.
Real Estate: Housing loans will be available at lower interest costs and EMIs will be reduced. We can expect demand to pick up in sales of houses. However, we expect some price correction in real estate sector across unban and tier II cities before pickup in sales.
Oil and Gas (PSUs): Companies in oil and gas sector are expected to benefit from reduced interest cost. Further, decline in oil prices shall reduce the subsidy burden.
Banks: Demand for loan increases across sectors – housing, automobiles, commercial, etc with decline in lending rates. Further, decline in government bond yields helps repair balance sheets with investment gains.
Construction and Infrastructure: Companies in this sector have high interest cost so they will feel some relief on profit and loss side due to lower in interest charges by bank. However, there are many hurdles and clearances required from government before executing an order. So, don’t expect much revival in this sector. Lower interest cost will be beneficial to few companies in this sector which has received financial closure from banks for most orders which are under execution.
Ideal Ways To Invest In This Volatile Market
• Accumulate large cap and mid cap stocks which have strong fundamentals and reliable management for long term when prices are at attractive levels.
• Invest in mutual fund schemes through SIP route. This is a safer route to invest in equities for long term and over the years it has taken care of volatility in the market by delivering higher returns compared to benchmark index.
• Investment in equities through Exchange traded funds (ETF’s) is catching up, which offer flexibility of a stock and protection of a fund. Over the years, average Assets under Management (AUM) in retail ETF has increased. An ETF invests in stocks that comprise an index. The proportion in which it allocates money may be the same as individual stocks' weight in the index or may differ. For example, a Nifty ETF will invest in 50 stocks comprising the Nifty, most likely in accordance with the weight of individual stocks in the index.
Conclusion
While investing directly in equities, take an advice of a financial planner or investment expert if you lack the skills to analyse the companies yourself. Time the market to enter and exit with expected returns from a stock. Don’t be greedy while investing in equities.
There can’t be 30% to 50% appreciation in price every year in a stock you invested. There will be period when same stock will start delivering negative returns for next two to three years. So, keep looking for good investment companies and analyse your portfolio on a regular basis. Analyse micro + macro economy factors while investing in equities and take an advantage to gain profits from investments.
Source: InvestmentYogi is one of the leading personal finance websites in India
