Life beyond 20,000: Invest carefully

With the equity markets retesting historic highs, you now need to frame your investment strategy carefully. After all, it’s better to be safe than sorry, as the adage goes.

Though India is in an economic sweet-spot presently, the world economy and the financial system face considerable imbalances and uncertainties. Any adverse global development could cause this gush of liquidity, primarily responsible for the swift run-up in domestic equities, to reverse direction pretty quickly leave India.

The way forward

Here are the possible courses of action available to you while framing your investment strategy at this point of time.

1. Invest: Indian equities still offer attractive wealth creation opportunities over the long term. You may hence consider investing into this market if:
Your investment horizon is at least five years and
Your allocation to equity is less than what you had desired or planned and
You are ready to stomach the interim gyrations of the market

Mr. Vikramaaditya, Chief Executive Officer, HSBC Asset Management (India) Pvt. Ltd., shares, “There may be volatility in the short term but the long term growth story is intact. The key to any investment strategy would be identifying the right investment opportunities.’

You may phase out your investments by using Systematic Investment Plan (SIP) for deploying fresh inflows into predominantly large cap funds. If you have a lump sum, you may consider a Systematic Transfer Plan (STP) from short term debt fund to equity fund, gradually.

Tax saving ELSS investments may be phased out over the remaining six months of this financial year. You may consider arbitrage funds for shorter terms as higher market volatility is conducive for such funds.

2. Rebalance: If the sharp run-up of the recent past has skewed your asset allocation towards equity, it’s time to rebalance. You may consider pruning your equity exposure progressively, using STPs to divert flows into a debt fund. This is also the time to rebalance your exposure to mid and small cap funds in favour of large cap ones. Saurabh Nanavati, Chief Executive Officer, Religare Mutual Fund says, “Get your financial planning done with a certified financial planner/adviser and stick to the asset allocation”.

3. Exit: If you need your money within the next two or three years, you should aim to preserve the gains that you’ve already made. You would do well to plan your exit in a phased manner using Systematic Withdrawal Plan (SWP), to minimise the risk of bad timing.

End Note

As Sandesh Kirkire, CEO, Kotak Mutual Fund says, “Investors must remain true to their investment objective, and the consequent investment design flowing from it. Therefore, any event must not be the determining factor in changing your long sought out strategy”.

Source: http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/Life-beyond-20000-Invest-carefully/articleshow/6633053.cms

Mkts strong: What should be your investment strategy now?

The markets have had a remarkable week, the Nifty has hit 6,000. That’s almost now close to the highs that we have seen, the all time highs. So, that’s a very crucial figure that it has hit.

The markets have been on a bull run, we have seen quite a good run up in stock prices. What really should you be doing at this point of time, if you have already invested or if you are intending to invest?

In an interview with CNBC-TV18’s Vivek Law, Anup Bagchi, ED, ICICI Securities says if one is already sitting on profits, it is a good thing to take some profits out.

He further says if one wants to invest at this point of time, he/she should not invest in a lump-sum manner. “Pick your stock, divide it into four or five or six parts, may be every week you invest and average it out or every day you average it out or every month you average it out.”

Here is a verbatim transcript of the exclusive interview with Anup Bagchi on CNBC-TV18. Also watch the accompanying video.

Q: Increasingly given the manner in which the market has run up, we get calls saying is this the right time for me to invest and of course at the same time you get calls for somebody who is already invested for a fairly long period of time, that is it the right time for me to sell. I know that this is an answer which would depend from stock to stock, sector to sector, but, overall, what is your view of what should a retail investor be doing at this point of time?

A: We also are getting lot of both kind of calls. Two things, the good thing is that most of the retail investors for whatever reason while they have not participated too much in the rally, but they have not got off the trade either. So, people who have had stayed in the market continue to stay invested in the market. For them, a little bit of profit taking could be good because markets are running on three fundamental factors, one is the economy doing well, is the sector doing well, is the company doing well, which is more specific.

Second one is on the valuation. Okay if it is doing well, at what price does it become better or at what price does it become out of reach, which is a valuation factor. And the third factor really would be the momentum factor, which is, is it being driven by liquidity or is it being driven by fundamental and because the valuation is very attractive.

I must confess that I would put 60% weightage right now on momentum, 30% I would put on fundamental factors and only 10% on valuations. Valuations from rich have only become richer. Fundamentally, of course, it is supporting, but large part of this movement and these sharp movements have happened because of gush of liquidity that has flown into the Indian markets, particularly by foreign institutional investors (FIIs). The domestic institutions don’t seem to be buying that much. They do not even have that much of liquidity to buy into the market. So, this is largely a very liquidity driven, momentum driven rally.

So what should one do? If one is already sitting on profits, it is a good thing to take some profits out and put it in debt instruments as well because interest rates are also luckily quite attractive. Good quality fixed maturity plans (FMPs) are coming from the mutual fund. So, they can put in there.

Clients who need to invest or who want to invest at this point of time, one really doesn’t know whether the market is going to go too much up or whether it is going to correct because it has already run up quite a bit. So, what we are suggesting to them is you must be invested in the market, but at this point of time do not invest in a lump- sum manner. That is if you have got a lakh of money to invest, do not go and jump one day and get overly excited and invest all of one lakh in one day. Pick your stock, divide it into four or five or six parts, may be every week you invest and average it out or every day you average it out or every month you average it out. But essentially get into the systematic investment plan not of the mutual fund type, but of the equity type, if you figure out that this is the stock that I need to buy. That way one will be able to average, one will be able to get the benefit of not timing the market or not trying to time the market and a benefit of a slightly long-term investing and getting the benefits of both upside and if there is a correction on downside as well. So, that is a generic thing.

Q: I am a new investor entering the market, would it be a safe bet to start with oil and gas sector?

A: I would tend to agree that when you do your first few investments, up to 70% should be in largecap diversified where you get an overall benefit of the market, 20%- 40%, from time to time you can take sectoral bets. There I would say that it might be a better idea to put part of it, 60%-70% in the largecap diversified funds, so that if the markets tend to move up then you get the benefit of the overall movement of the market.

Coming to oil and gas sector, I think oil and gas sector is a policy bet. We all believe that all these companies, all the PSU companies are very strong, they are very asset rich, they are very well run and this is more of a policy bet and that if reform comes then it will start to do better.

Within oil and gas sector if you have some knowledge and if you have done some reading in oil and gas sector, if you were to pick up a stock, I would still say that GAIL could be the better of the stock because I don’t think you will be able to diversify too much between oil and gas sector. But I would say first 70% of your money, whatever is the money, try and invest it in the large cap diversified. Thirty percent if you want to get a sense of stock market, in oil and gas sector you can invest with the stock that I am just suggesting.

Source: http://www.moneycontrol.com/news/market-outlook/mkts-strong-what-should-be-your-investment-strategy-now_486847.html

‘Infrastructure stocks, a good bet' CIO-EQUITY, ICICI PRUDENTIAL MUTUAL FUND

The market does offer pockets of opportunity such as infrastructure stocks, where money can still be made. However, investors should not make any sudden shifts in their allocation to equities, cautions Mr Sankaran Naren, CIO- Equity, ICICI Prudential Mutual Fund, when Business Line spoke to him about the Sensex at 20,000.

The Sensex has hit 20,000 again and there is a lot of scepticism about the markets holding up at these levels. Normally markets never correct when everyone expects it to! What are your thoughts on this?

In the Indian markets, there are two types of investors — locals and foreigners. Yes, the locals are very sceptical about the markets and valuations because India is the only market where they invest.

We can afford to be sceptical! The foreign investors don't see growth in their home markets, and thus, find Indian stocks with their strong growth potential, attractive. Local investors have not invested in the markets and local institutions have been consistent sellers in this rally.

You must understand that mutual funds sell only if they have an outflow from their retail investors. We don't operate like hedge funds! In our case, the outflows have been small. However, the industry-wide outflows must be significant, given the consistent domestic institutional selling in stocks that we have seen over the past few months.

One clear theme driving this rally has been domestic consumption. The sectors leading it were consumer durables, to automobiles to FMCGs. What's your take on those stocks now?

I think infrastructure should be the driving theme for India. If you compare China and India, the consumption part of GDP is lower in China and is higher in India. China has a current account surplus while we run a deficit. If you see infrastructure bottlenecks, it is in India that we face them to a large extent. That makes a case for playing the consumer theme in China and the infrastructure theme in India, while the reverse is happening! I think as we approach the retail consumption season with festival sales and so on, this would be cyclically the appropriate time for the consumption theme to peak out.

The ICICI Pru Infrastructure Fund has managed a five-year return of 25 per cent, but has underperformed diversified funds in one year. What's the argument for investing in infrastructure stocks now?

That makes it a good time to invest in the fund. There is a big gap between what has happened on infrastructure and non-infrastructure stocks. Look at the stocks that represent the infrastructure theme; the theme has been a substantial underperformer. Whether you take power utilities, capital goods or even construction stocks they have all underperformed very sharply. If you look at the non-infrastructure space, whether FMCGs, autos, pharma or technology that is where all the outperformers have come from.

Here, consumer stocks have also moved to a premium over the market while infrastructure stocks have seen valuations correct significantly. If you had to invest now, this makes infrastructure a good bet. Valuations in the sector today are much more comfortable than valuations of sectors that have led this rally. I think Indian infrastructure stocks benefit from the fact that demand potential is so high. In the US, for instance, power utilities are dividend yield stocks. In Europe, again, such stocks are not growth plays.

Are infrastructure companies delivering the expected earnings growth?

One factor that is acting against short-term earnings for the sector is the fact that we have had a good monsoon this year. A bad monsoon aids construction activity but a good one leads to a seasonal disruption. This is reflecting in the quarterly numbers. But it does not in any way alter the outlook for the infrastructure sector. We think the period from 2011-2014 will see an infrastructure-oriented cycle.

Another factor is that infrastructure spending is now being driven to a large extent by the private sector and not just by government. If you break it down, power generation capacity is now being driven mainly by the private sector. If you take roads, you have a fair number of projects happening through BOT route. In ports, a number of projects are coming in through the public-private partnership route.

The earnings growth for Indian companies over the past two quarters has not been too high, the earnings for the CNX 500 companies, for instance, has grown only in the single digits. Is that not a risk to the current valuation of 23 times for the market?

The problem is that market valuations have really climbed and stocks have become more expensive. Expectations have risen to a very high level and those expectations are barely being met by earnings.

There is also divergence, where some companies are meeting those expectations while others are not. The problem about valuations is that we cannot today say that Indian markets are cheap. They are expensive relative to rest of the world. For this valuation to sustain, the results have to be good and the GDP outlook has to remain good. If you look at where we were six months ago and where we are now, there is risk. On the positive side, food inflation is not accelerating any more and the monsoons have been good.

What explains the surge in FII inflows in the past month, where over $3 billion of funds has come in within a month? Is it the upward revision in GDP outlook which has made the difference?

In my view, there has been a growth scare in the Western world and a growth scare in China as well. Consequently, all the growth-oriented money has come to India. That has, however, resulted in a situation where the Indian market is no longer cheap. Certain segments such as infrastructure may be cheap, but not the market as a whole.

A lot of the recent inflows into Indian markets are said to originate from passive Exchange Traded Funds who are only chasing the index. Do you thus, see the gap between index stocks and other stocks widening?

I am not sure if that is entirely correct. If a good portion of that money was ETF money then why would we see such a big sectoral deviation in performance? And it is not as if only benchmark stocks have performed. Even smaller stocks within the consumer theme have performed. The advantage with large caps is that they are less dependent on how interest rates pan out. Small and mid-caps are vulnerable to interest rate risks, especially in infrastructure stocks.

We believe interest rates will peak over a six-month period and then one can move from large caps to mid-cap stocks. You are also approaching the busy season in credit, with activity in the short-term money market peaking in March each year.

If retail investors have lost out on this rally, what should they do now?

I would suggest three things. Investors should look out for pockets of opportunity such as infrastructure stocks, which remain attractive. They should invest through systematic investment plans. And they should not make any sudden shift in their asset allocation towards equities.

Source: http://www.thehindubusinessline.com/iw/2010/09/26/stories/2010092651171200.htm