Structural reforms can unleash India's true potential
The stock markets have been volatile over the last few months due to a slew of factors. Investment has softened and data is pointing to a fall in manufacturing and service-sector output.
At the same time, the current account deficit is at a record high, a persistent fiscal deficit has raised the threat of sovereign rating downgrades and the central bank's current cash-draining steps presage a rise in borrowing costs across the economy. Indeed, the 4.4 percent GDP growth in the the April-June 2013 quarter points to the stark reality of the fundamental deterioration.
The markets are also affected by the US' quantitative easing programme, strengthening of the US dollar and slowdown in China and in the developed countries.
Lower growth expectations arising from uncertainty in the near-term on the macro-economic front and political fronts has kept the markets at dormant levels. The present market situation has not only made investors nervous but also sent many of them rushing to safer havens.
A majority of investors, however, are at a standstill over their next moves. Should they still stay invested in the market for the long-term or exit to cut their losses? Is this the right time to start picking from a long-term perspective or should one still hang on in anticipation of the market offering more attractive levels to get in?
Ray of Hope
Even though cynicism remains high on the Indian equity market, a close examination of the fundamentals reveals a few positives. India's urbanising population is the greatest asset that will help drive down the dependency ratio and push up the growth rate. Attractive valuations and the massive size of the Indian market will keep attracting FIIs to India's stock markets in the long run. The main test is to successfully steer our way around the short-term barriers and stay engaged on the long-term priorities for high growth.
However, in the light of the current weak macro-economic environment, a well-planned economic resurgence policy initiative from the Indian government is required to get the economy back on the path of steady and prosperous growth. The government has introduced new duties on imported televisions, moved up the tax on gold and hiked deposit rates to battle the outflow of money.
The newly appointed RBI governor, Raghuram Rajan, has announced a slew of measures to restore confidence among investors in the Indian growth story. This includes more trade settlements in rupees to save the battered financial markets and a shift in focus from controlling inflation to boosting growth.
What is to be done?
Building and retaining an appropriate asset allocation can help you augment returns and reduce volatility over time. As most investors aim to build a corpus over different time horizons through smaller contributions, the solution is to not only invest systematically but also select alternatives that are tax-efficient and provide the required flexibility to make changes as and when required. Investing systematically in a spread-out way is the best approach to cope with the current volatility in the equity market.
* Let a long-standing strategy based on your investment horizon, goals and risk appetite decide your actions in a volatile market
* Invest on a regular basis instead of lump-sum investment in order to ensure your investment is not dictated by market performances
* Watch out for sectors and stocks that may have been beaten down but have a lucid earnings visibility
* Look for beaten stocks with attractive valuations and sound fundamentals
Investors should always enter the market with a long-term investment approach through systematic investments. Long-term investing is akin to being committed to a sound investment plan - a plan that begins with a proper asset allocation appropriate to your risk tolerance over a period of time. Spreading your investments over longer time periods is a better way to manage risk. This offers an attractive opportunity for long-term investors who have a horizon of 2-3 years in mind.
Equity market strategies present the potential for attractive long-term returns compared to other asset classes as well as a high level of liquidity.
At present, valuations are reasonable and can be a huge positive for the market. Good companies will continue to perform well and when interest rates and inflation might come down, there will be a convincing case for a strong market.
In the meantime, signals are emerging that India's current account deficit could narrow in the current fiscal from the record high of 4.8 percent of the gross domestic product. The government has taken a slew of measures to boost exports and reduce imports to lower the trade deficit which, in turn, will reduce the current account deficit. The government is also seeking to increase capital flows to assist the financing of the current account deficit.
Economic reforms can help improve the investment climate by boosting investor sentiment. The RBI and the finance ministry need to work in tandem to revitalize the economy by drafting effective measures to boost confidence. If the government is able to push through structural reforms, this phase could probably lay the foundation for higher sustainable growth in the future. It will further propel the Indian economy in making its mark as a globally attractive destination for the financial services sector.
Once we clear these hurdles, there is no stopping India from becoming one of the most attractive markets in the world. When you are in quicksand you go down quicker if you flay your limbs wildly. Sure, things are currently in bad shape but in every circumstance the outcomes are based on how you respond and take advantage of the situation.
(15.01.2014 - Prashant Sharma is chief investment officer of Max Life Insurance. The views expressed are personal. He can be reached at email@example.com)
(Posted on 15-01-2014)