Once again the slowdown in the Indian economy has been affirmed by the Q4 FY 2011-12 Gross Domestic Product (GDP) growth of 5.3% as against 6.1% in the previous quarter and 9.2% for the same period last year (2010-11). The Q4 GDP growth of 5.3% also marks the slowest pace of growth in nine years. Moreover, GDP growth estimates for the Q1 FY 2011-12 and Q2 FY 2011-12 have been revised to 8.0% and 6.7% from 7.7% and 6.9% respectively estimated earlier. For the full year 2011-12 the GDP growth came in at 6.5% as against 8.4% in FY 2010-11.
(Source: CSO, PersonalFN Research)
The plunge in the Q4 GDP growth can be attributed to:
- Manufacturing growth: The manufacturing industry plummeted to -0.3% for the Q4 FY 2011-12 as against the previous quarter. Several factors such as high interest rate regime for the most part of the fiscal year, slow pace of essential reform measures, political instability, and poor business environment along with deepening crisis in the Euro zone have contributed to the faltering manufacturing growth.
- Agriculture, forestry & fishing: The agriculture industry too couldn’t revive the overall GDP growth as it displayed a dismal growth of just 1.7% as against 2.8% in the previous quarter. Poor growth in agriculture can be attributed to the unseasonal rains in month of April 2012 and May 2012. But with the monsoon expected to be normal this season, the food-grain production may get a boost. However, storage facilities too need to be upgraded and expanded in order to save the food-grain production from getting rot.
- Mining and quarrying: The mining and quarrying industry on the other hand has put up a good show by growing at 4.3% as against -2.8% in the previous quarter. However, for the full year 2011-12 the growth in this sector was still in the negative terrain at -0.9% as against 5.0% in the previous fiscal.
- Construction: The construction industry too suffered a setback as the growth numbers came in at 4.8% as against 6.6% in the previous quarter. Going forward with the interest rates expected to ease down gradually, the borrowing costs of companies will also reduce giving an impetus to execute their capex plans.
It is indeed a poor performance by our country on the economic growth front but nonetheless the Government at the centre should certainly show some mettle by undertaking policy reforms in order to improve the business environment in the country and get the country back on the high growth trajectory.
We believe that in the midst of the soaring inflation which came in at 7.23% for the month of April 2012 and the plummeting IIP growth of -3.5% for the month of March 2012, GDP growth of 6.5% for the year 2011-12 looks satisfactory. Had the key policy decisions been taken on time and there would have been fewer differences between the ruling party & opposition things would have been different. However, going forward too, the activeness in taking timely decision by the ruling party will be an important determinant of the growth prospects to be offered by the country.
What should equity investors do?
We continue to believe, as mentioned earlier, that as long as our economic growth rate is +6.5% year-on-year on an average, there is not much to worry as it would entice Foreign Institutional Investors (FIIs) to look at India as attractive investment destination in a scenario where the developed economies are clocking dismal economic growth rate. Moreover prudent policy measures (if implemented on time), lower debt to GDP ratio and strong consumption theme are supportive factors for us to meet such expectations.
Yes, in the near term the news disseminating from the developed economies – especially Euro zone and the U.S. may show a rippling and crippling effect on the Indian economy and its equity markets. But we believe that one needs show patience and perseverance in such times and stay invested for the long-term, and also invest further as soon as valuations look attractive.
Hence one needs to be cautious while investing in equities and rather have a staggered approach.
For investing in equities we think diversification benefit provided by mutual funds can help to reduce risk (however one needs to stay away from U.S. or Euro oriented offshore funds in such a scenario). While investing in equity mutual funds we recommend that you opt for value styled funds and adopt the SIP (Systematic Investment Plan) mode of investing as this will help you to manage the volatility of the equity markets well (through rupee-cost averaging) and also provide your investments with the power of compounding.
Remember, while investing, select only those equity mutual funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.
What should debt investors do?
Well, we think that the current situation is attractive to take exposure to debt mutual fund instruments as interest rates are likely to ease gradually.
We recommend investors to take gradual exposure to pure income and short-term Government securities funds, since longer tenor papers will become attractive. Longer duration funds (preferably through dynamic bond / flexi-debt funds) can be considered, provided one has a longer investment horizon (of say 2 to 3 years). Short term income funds should be held strictly with a 1 year time horizon. Fixed Maturity Plans (FMPs) of upto 1 year would continue to yield appealing returns and can also be considered as an option to bank FDs only if you are willing to hold it till maturity. One may also consider investing their money in Fixed Deposits (FDs). At present 1-yr FDs are offering interest in the range of 7.25% - 9.25% p.a.
What should investors in gold do?
In our view the downbeat global economic headwinds make the case for gold becoming bolder. Moreover mellowing economic growth rate posted by most economies across the world would encourage smart investors to take refuge under the precious metal. It is noteworthy that gold has displayed a secular uptrend since a long time now. In 1971, the price of gold was about $32 an ounce and today (i.e. on May 30, 2012) it is $1,540 an ounce – which indicates that price of gold has gone up by 48 times over the last 41 years.
Hence, nothing has changed for gold and we believe it will continue to maintain its upward trend in the long-term. However, there may be some sideways movement as the marriage season is over and thus the demand for gold jewellery may reamin subdued. Even stockists would not pile up the yellow metal due to low demand. At PersonalFN, we recommend that you should have a minimum of 5% - 10% allocation to gold through gold ETFs (the smart way to invest in gold), and invest it with a long-term time horizon of 10 to 20 years.