Time to accumulate equity assets as financial markets at the cusp of growth

January 14, 2015

(Any opinions expressed here are those of the author and not necessarily those of Thomson Reuters).

Brokers trade on computer terminals at a stock brokerage firm in MumbaiOf the many bright spots in 2014, one clearly stands out: retail investors have started moving into financial assets such as debt and equity. Both these asset classes have done reasonably well last year, and there is still a vast scope for them to do well in the medium to long term.

Hence if you have been buying equity and debt assets through mutual funds last year, continue to do so in 2015. If you haven’t begun, there’s no better time than to do so now.

There are plenty of reasons to favour financial assets. First, India could benefit immensely from lower commodity prices, especially that of crude oil. The country is a huge importer of the commodity, and savings in foreign exchange are quite substantial on this front. Cheaper oil eases the squeeze on the current account deficit and fiscal deficit. It will also help tame domestic inflation. Global factors could keep oil prices lower for some more time, which may affect domestic exporters of oil.  Even prices of base metals are down. We are certain that this would go a long way in reviving the Indian economy.

The recent structural reforms undertaken by the government are significant, and the steps taken on diesel deregulation, gas price hike, coal ordinance, financial inclusion, ‘Make-in-India’ campaign, and foreign direct investment in railways and defence are all structurally beneficial for the economy.

But the key to good growth in the coming years will rely on sound execution. As an example, all eyes are now on coal auctions slated for the first quarter of 2015. If the exercise goes off smoothly, it would set the stage for coal production to increase in the next three to five years. It can also pave the way for more widespread and better execution in other areas of the economy. Industrial production could then be high and fiscal and revenue deficits significantly lower.

It is better to invest in equity during the initial stages of a recovery rather than later, so view 2015 as a year to invest rather than as a year to reap gains. Investors should moderate their returns expectations this year and invest with a horizon of three to five years. The crux is to keep investing. A broker monitors share prices while trading at a brokerage firm in Mumbai

This year could also see good returns being made from debt investments as one can expect interest rates to come down sooner or later. Since last October we have been positive on debt as the macro-economic trends have been showing signs of improving. Clearly, fixed income could deliver, especially in funds that are invested in debt of longer maturities. Lower inflation is likely to provide the Reserve Bank of India with sufficient room to cut rates, which in turn could boost the debt market.

There could be periods of volatility in 2015 mainly due to global factors. Events like the sharp fall in commodities prices, especially crude oil, have created instability in commodity-linked countries like Russia. This could have ripple effects on other financial markets. On the domestic front, we need to keep a close eye on reforms being implemented by the new government.

However, declining crude prices and reasonable GDP growth prospects make India attractive among emerging markets. Investors should lap up as much equity assets as possible. If you can stretch yourself to make more investments this year by using the volatility to your advantage, you will be sitting on big rewards a few years down the line. The key to a good kitty is to avoid looking at returns from a short-term perspective.

 

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