Sunday, February 3, 2013


2012 was a great year for both the equity and the debt investments.

The Sensex moved up 25.7% during the year to close at 15455.  During the same period, true to form as an outperformer in up-markets, the midcap index gave a return of 38.5% to end the year at 7113. This is however following year 2011, where the Sensex fell 24.2% and the Midcap index fell 33.4%. In fact the Midcap index is still not at the 31st December 2010 level of 7715.  India has been amongst the best performing markets in 2012.

Debt market also gave great returns. The year started with yield of between 9-10% for very short term funds, medium and long term funds. The yields tightened further by March 2012. RBI had already announced that they would be no more interest rate rises during the year. However the 50 bps rate cut in April 2012 was unexpected and very welcome. The short term debt funds yields immediately fell giving capital gains in that category. By December, the clamour for further rates cuts, even by the Government was strident, and yields fell drastically in December. The Open Market Operations undertaken by the RBI (where they were buying Government Securities) ensured the 10 year GSec rates fell by about 30 bps in one month. However, the RBI governor gave only 25 bps repo rate cut in January, 2013, the run up of which has already happened in December.

How much can this all be repeated in 2013?

1.  Global Scenario

        With what started as a Lehman crisis and housing crisis in the US, swiftly spread all over the globe, especially to Europe. However, the European Union has not broken up although Portugal, Greece and Spain are in a depression and the rest of Europe is in recession. US GDP has started growing, however last month there was a negative figure. Shale gas discover in the US will be a game changer for that country.  China’s Purchasing Managers Index has been increasing indicating that the country’s manufacturing activity is gaining some momentum after slowing last year. The final EMI report for 2012 stated that although economic activity rose during the year, it was at a rate weaker than the average shown over the 4 years since the economic crisis in 2008.

     2. Foreign Institutional Investor inflows

             During the year, FIIs invested Rs. 24 billion in our equity markets. As the Indian investors are absent in the market and as the Domestic Institutions have to sell at every rise in the markets, we are reliant on FIIs to push the markets further up. However, with China’s improved manufacturing data, there is going to be a competition to being the recipient of FII flows.

 3.  Political Reforms

           There was a flurry of reforms in the last quarter of 2012 with the FDI in retail and aviation being passed, cap on LPG subsidies, hike in diesel and petrol prices and cash transfers and this all has boosted the market sentiment. Passing of the Goods and Services Tax and the Land Reform bill, if done, will be a game changer. However, the Government will start to focus on 2014 elections, and there will be no desire to control expenditure.

4.  Gold

       Gold which has shone brightly over the last few years lost their sheen in 2012, giving a 10.5% returns. In dollar terms the return has fallen to just 7%. With this run up in equities, the Mutual fund industry witnessed an outflow, whereas gold purchases continue to remain positive.

5.   Oil

        Brent crude averaged 2012 at $ 111 per barrel. It gained just 3.5% in the year after rising 13.3% in 2011. However as India imports most of its oil requirement, we could not take advantage of this low growth because of the weakening rupee. However the oil market rose sharply in January to $ 117 per barrel, and this is going to put further stress on our deficit.  US shale discovery has the country less dependent on importing oil.  Last month, Australia too discovered huge reserves of oil.

6.   Valuations of the market

              At the end of 2011, the Price/Earnings of the Sensex were 16.41 times and the Price to Book Value was 3.13 times. At the end of 2012, after a 25% growth in the Sensex, the PE of the market is now 17.53 times but the price to book value has gone down to 2.97 times. The average PE of the market has been over 19 times, hence we are below average valuations. Further in the December quarter results many companies are beginning to show a bit of a turnaround and will be re-rated.  We are coming to the end of the earnings downgrade cycle. However revival of the investment cycle may take some time.

    7.  Interest rates.

                RBI governor had indicated at the end of 2011 that he was done with rising interest rates, which was hurting growth. So far the RBI governor has cut 75 bps repo rates. However, he did sound a note of caution that if inflation remains stubbornly high, interest rates might not fall as fast as expected.

All the above points only let us know what the current situation is and do not let us really know in which asset class we should invest.

There are a few simple rules which allow us to take the stress out of investing:

  1.  Decide on your asset allocation between debt, equity and even gold, if you wish, depending upon the amount of risk you are willing to take. However, understand that equity will give the best returns of the three over the long term. 
  2.  If your financial goal is less than 5 years, invest only in debt funds. However, do consider the effect of inflation on your wealth creation, and ensure that your debt investment post tax gives you a higher return than inflation. This would mean investing in debt mutual funds which are more tax efficient. 
  3. If your financial goal is more than 5 years, then invest in equity. However profits in equity should be booked as the valuation of the market goes up. 
  4. If your goal is wealth management, then invest as per your asset association. Your asset allocation should be maintained when the PE of the markets are between 16 and 19 times. For every 1 point below 16 times add 5% to equity and for every 1 point above 19 times reduce 5% from equity.

As Bruce Greenwald, who is recognised widely as a value investor expert, said,           “There are no bad days in the market. When the market is down, you’ve got a bargain, and it’s lovely to think what you are buying at low prices. When the market is up, the bargains have gone, but you’re rich.”

Hence do not agonise at what the market is doing now and likely to do going forward. Follow the rules, or better still work with a Certified Financial Planner, and you will not have to worry achieving your financial goals or creating wealth.