The year 2012 has been rather eventful. We began the year with an exuberant impulse for the Indian equity markets although gloomy clouds of debt-overhang situation in the Euro zone were evident. The following initiatives taken by the Government in power did help the Indian equities to depict an uptrend, especially in the second-half of the calendar year:
· Allowing foreign individual investors, pension funds and trusts to directly invest in equities
· Deferring General Anti-Avoidance Rules (GAAR) by 3 years, thereby making investment climate conducive in an uncertain global economic environment
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· Simplification in the process of Initial Public Offerings (IPOs)
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· Making mandatory for companies to issue IPOs of Rs 10 crore and above in electronic form through nationwide broker network of stock exchanges
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· Providing opportunities for wider shareholder participation in important decisions of the companies through electronic voting facilities
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· Reducing Securities Transaction Tax (STT)
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· Reforms measures taken with passage of important bills thereto in the Parliament
· Government showing determination on its path of fiscal consolidation
Yes, in the intermediate both Indian as well as global markets were exposed to worries such as rating downgrades, lull in economic growth rate, "Grexit", a double-dip recession in the Euro zone, fiscal situation in the U.S. and political uncertainty. But the markets did depict smart gains especially in the second half of the calendar year 2012, when worries did fade to an extent and reported absolute returns as revealed in the chart above. While equities did undergo a turbulent phase in the first-half of calendar year 2012, gold trended steadily up and acted as a good hedge.
We are of view that, going forward too we may encounter volatility due to global factors such as debt crisis in the Euro zone and fiscal cliff faced by the U.S. The Federal Reserve may extend its monetary stimulus (commonly known as Quantitative Easing) but they are cognizant about the fact that this (the fiscal cliff) may pull the country into a recession, if the taxes aren't increased. In the Euro zone although tense nerves of debt crisis have calmed down with European Union (EU) and the International Monetary Fund (IMF) have agreed to unblock Greek bailout with a package of measures worth €40 billion (aimed at bringing an immediate 20% reduction to the country's debt) and loan restructuring being approved (by European Commission) for Spanish bank loans (which is expected to inject around €37 billion into the Euro zone); it would not be too long before fresh crisis in Europe could flare up. Moreover in the domestic market, we may witness political turbulence ahead of general election in 2014, which could affect the equity markets. But if the Reserve Bank of India reduces policy rates as hinted beginning first quarter of calendar year 2013, we may see intermediate impulses and revival of economic sentiments and if the Budget 2013 too is populist (before we head for general elections in 2014).
In the background of the above, we recommend investor to stagger their investments to mitigate risk. While in investing in equity mutual funds, we recommend one opt for the SIP(Systematic Investment Plan) mode of investing, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding. However while selecting mutual funds for your portfolio, prefer the diversified equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.
Gold will continue to do well in the backdrop of an uncertain global economic environment yet. Smart investor would continue to take refuge under gold, and therefore demand too would pick-up. We recommend that you should have a minimum of 10% -15% allocation to gold and invest in it with a long term perspective, with a time horizon of 10 to 20 years.
Best Regards
Prakash Nair
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