2016 will be the year of accumulation. You might miss the bus if you don’t
accumulate persistently enough
In 2016, markets may not be easy, but it’s going to be another good year for
investors to go on an asset accumulation drive. Every year-end, it’s worth
every rupee to re-check your portfolio and investment strategy, and make course
corrections, depending on market conditions. Financial markets do not always behave
the way we want them to. But as Peter Lynch notably remarked, to make money, one
doesn’t have to predict the market.
Looking back at 2015, regretfully or not, the market’s performance was a mixed
bag. At the start of the year, there was optimism about the debt market. The conditions
for a rate cut, such as lower inflation and current account deficit being under
control, were largely in the making. And as expected, the Reserve Bank of India
(RBI) cut the interest rate, in phases, by 125 basis points, bolstering the debt
market. One basis point is one-hundredth of a percentage point.
On the equity front, my view has been that markets would remain volatile till the
first rate hike in US is digested. At the same time, there was general caution about
the rich valuations that equity markets then sported. Looking back, equities haven’t
done too badly, but there have been spots of bother. In 2015, large-caps lost about
7%, while mid-caps gained about 7%. With the US Federal Reserve now reiterating
its earlier stance that further rate hikes would be gradual, and an accommodative
stance will be maintained, much of the negative overhang of a rate cut is now behind
There was also optimism around the domestic economy. It was expected to recover
in 2015, given the better macro-economic conditions of controlled current account
deficit and lower interest rates. But this didn’t quite turn out as anticipated.
The recovery seems to be taking a bit longer, also because significant global challenges
have arisen in the year gone by. Oil prices plunged; that led to shrinking demand
and global growth rates. This had quite an impact on the domestic economy.
Indian corporate earnings recovery also did not take place as the lower prices led
commodity companies into a downturn. However, lower prices drove an increase in
consumption. Some Year 2016 is expected to be another promising year for financial
assets. Real interest rates are now high because of lower inflation; that should
drive more investors to financial assets. Further, equity prices have slid low enough,
and interest rates are expected to be softened by another 50-75 basis points in
2016. Nevertheless, some challenges persist. For a more meaningful and broad-based
recovery in the domestic market, a sound revival in capital expenditure is a prerequisite.
Rising consumption can only take the markets forward for a short duration. A longer-term
sustainable earnings recovery has to be powered by a long-term revival in capital
Globally, too, the challenges are not yet fully behind us. With the Fed having hiked
interest rate, markets are now entering a new, and potentially interesting, phase.
While the Indian markets will not be greatly affected thanks to strong macro-economic
fundamentals, a slower-growing global economy would pose some challenges, often
Hence, an exceptional earnings recovery is not likely, particularly in the first
half of 2016. But earnings growth has already been downgraded by analysts in the
past year. This year, earnings growth could be driven by consumption sectors.
But the good thing is that India is expected to be one of the fastest-growing markets
in the world—and that will be noticed by foreign investors. I expect gross
domestic product (GDP) growing at 7.5% or thereabouts. The big themes that will
be driving this growth would be urban consumption, government capital expenditure
and investments. Also, fiscal deficit targets would be met.
A slow and gradual upswing in the Indian domestic market would make it a compounding
market over the next three years. While equities have corrected, investors can look
forward to better markets conditions. But watch out for volatility that can crop
up frequently due to disparities in the world economy, and with the US economy strengthening
and emerging markets slumping.
Overall, large-caps are undervalued and present an attractive opportunity. They
have come under stress due to selling by foreign investors. At present, mid-caps
are quoting at a price-to-earnings (P-E) ratio of 19.2 times, and large-caps at
16.9 times. The valuation gap between these two segments was the highest in the
But valuations aside, investors should focus on getting the basics right in 2016.
Some investors are, naturally, waiting for the market to fall further. But do remember
that financial markets don’t always behave in the manner we want them to.
Valuations are reasonably attractive; so continue to make financial investment purchases.
A strategy to use this year would be to invest in hybrid and balanced funds. The
markets will tend to witness some volatility, driven by news, both external and
domestic. Hybrid funds, on their part, often experience less choppiness as the debt
portions limit the effect of serious equity gyrations.
Another game plan one should follow is: consistency. The benefit of returns in the
long run are secured when you purchase at attractive prices. As you add more equity
funds to your long-term portfolio, the compounding effect these can produce on the
end results could be good. In fact, 2016 will be the year of accumulation. You might
miss the bus if you don’t accumulate persistently enough.
This article was published on January 13, 2016 in Mint
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