Thursday, January 21, 2016

Go on an accumulation drive

The Indian equity market in 2015 was relatively well-behaved and held up firmly against other emerging markets, which have fallen more. Though large-cap indices have lost about 7 per cent, the overall market has been quite strong with mid and small-cap indices registering gains of around 10 per cent last year.

Some green pastures

Going into 2016, the global economy is still showing lack of growth, barring the US. While the European economy is still grappling with a recovery, the Chinese slowdown is also a cause for worry. The deep correction in oil prices has impacted global growth and has affected some of the sovereign wealth of oil producing countries as well.

But the good news in the domestic market is that building blocks are in place for a good recovery in the latter half of the year. The better macro-economy, lower inflation, strong reserves, lower interest rates, and the progress in reforms are showing signs of promise that a pick-up is coming before the year-end.

The other piece of good news is that the lower commodity prices (such as for oil) are driving up the consumption side of the India story.

We are seeing an improvement in demand for automobiles, travel, cement, and logistics. Some parts of the markets are reaping the benefits of this improved consumption growth. Hence, we see another promising year ahead.

Real interest rates in the hands of investors are high because of low inflation. This will lead to investors looking favourably at financial assets.

Additionally, as equity prices have come off significantly from last year’s highs, valuations, too, are turning moderately attractive.

Some challenges too

However, some challenges remain. We still have to see a revival in the investment cycle. The private sector has to participate, sooner or later, to keep the India growth story on a sustainable track. The Indian equity markets present a gradually compounding market over the next three-five years.

However, one cannot rule out the volatility of the global markets. On the whole, large-caps are relatively better valued than mid-caps. At present, valuation in the mid-cap indices is closer to 19 times, while the large-caps are at around 16.5 times. The difference in valuation in these two indices is at the highest level in the past one year.

At the moment, opportunities are unfolding and hence investors could take the conservative route of investing in low-risk balanced funds and dynamic asset allocation funds that are structured to make the most of the falling markets, by buying more equities when their prices fall.

Another strategy for investors is to invest regularly. The best times to accumulate assets are when their prices are low. In fact, 2016 is when investors could go on a super accumulation drive.

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