Many companies are sitting on under-utilized capacities and are unlikely to increase
The year 2014 has been a good year for financial assets. However, investors are
more than a little concerned that, going into the new year, markets are showing
signs of volatility. The slipping and sliding in the front-line indices have shrunk
year-to-date returns to around 30%. Before the correction, it was a good 36%. (Source:
Nevertheless, going by the past average of around 18% per annum, the present returns
are still good. As we head into the New Year, long- and short-term investors alike
should evaluate market conditions and then attempt to pitch investments for a decent
shot at improving run rates. Here are a few points that could prove useful to spruce
up your investment portfolio next year.
Global headwinds are likely to increase volatility and the effect will be felt throughout
the world. First of all, we have been repeating for some time now that following
the end the quantitative easing (QE) programme in the US, the international environment
is changing. For the first time we are faced with the prospect of interest rates
in the US inching up, probably towards late-2015. In this context, the inevitable
strengthening of the dollar would affect global fund flows.
India, however, is better placed to withstand global choppiness. The Reserve Bank
of India (RBI) has been factoring in the inevitability of QE coming to an end. Otherwise,
we may have seen much lower interest rates today. This augurs well for India, as
it can help tackle the tighter monetary policy, and a hike in rates in the West
going into next year.
Another advantage we have now is that commodity prices are lower. Back in the market
boom of 2002-07, commodity prices hit higher trajectories, creating problems for
India later on. Now, oil has slipped below $60 a barrel and oil-guzzling countries,
like ours, benefit through savings in foreign currency costs, along with helping
Other base commodities are also at lower levels, and that helps reduce input costs
for companies. So, India has become one of the better macro-country going into 2015.
With softening international energy prices, better alignment of electricity prices
with costs, moderating global commodity prices, and a stable rupee thanks to the
Reserve Bank of India’s (RBI) remarkable efforts to keep policy rates at elevated
levels, could reduce inflation in India.
Need for infrastructure spending
However, one hitch in our parade is the domestic capital expenditure (capex) cycle.
The Indian economy only needs a little prod, which could begin with the government.
India has yet to see the kind of investment in infrastructure that could revive
the capex cycle. Many companies are sitting on under-utilized capacities and, therefore,
are unlikely to increase capex in the immediate future.
Hence, the onus to increase spending on infrastructure now lies with the government.
I would be enthused if the government reduces the revenue deficit while letting
the fiscal deficit remain a little loose, and in the process, opening its purse
to spend on infrastructure. There is a need for the government to spearhead capex
in the country, especially on infrastructure. Once the capex kicks in, the private
sector will step in, turning it into a virtuous cycle.
Markets to provide opportunities
It may be difficult for the Indian market’s performance in 2014 to persist into
2015. From that standpoint, I would encourage investors to enter equity markets
with a horizon of at least three years or more. It is my belief that next year,
there may be ample opportunities to accumulate equity assets for three years and
Given the fundamentals of the economy, the macro-growth cycle has barely begun.
In the past, it took four-six years for the growth cycle to take off. This time,
with the added advantage of lower commodity prices, the Indian growth cycle has
Therefore, use the opportunities thrown up by corrections in the market to accumulate
good assets as well as to look for underpriced equity assets. With the run-up, many
sectors are well-priced, but some names in the fast-moving consumer goods (FMCG)
sector do not offer much comfort. Public sector divestments could offer good opportunities
to accumulate some equity assets at good prices next year. Again, 2015 may see the
power sector recover within the next three-five years; and it now looks inexpensive.
Over the shorter horizon of a year, the fixed income segment looks good, although
upturn in debt had already begun in the past few months.
With inflation cooling, and oil prices down, there is room for the central bank
to cut rates in the coming year. This could provide the requisite fillip to the
A fixed income boom has to occur before growth in the economy shifts to a higher
gear. The interest rate cycle has to turn for the leveraging cycle to begin; this
could, in turn, boost the equity cycle.
This article was published in Mint on 24th Dec 2014
Toll Free Number
© 2013 ICICI Prudential Asset Management Company. All rights reserved