The Index of Industrial Production (IIP) for the month of July 2012 stood just on the brink of turning negative, at 0.1%. Moreover, the negative growth rate of -0.1% between April 2012 to July 2012 period (as compared to 6.1% growth over the same period a year ago) reflected the weakness in the IIP growth. The the IIP growth for the month of April 2012 underwent a downward revision to -1.3% from -0.9% estimated earlier.

Despite let down by the manufacturing index, the production of consumer durables have assisted the overall index to remain on the green turf, as goods manufacturer produced more ahead of the festive season to meet consumption.
 

The See-Saw movement of IIP continues

(Source: CSO, PersonalFN Research)
The following factors had their bearing on the IIP data for the month of July 2012:
 

• Manufacturing index, which constitutes about 76% of the industrial production index, displayed a negative growth of -0.2% as against almost -0.3% growth in the previous month. Moreover, on a Y-o-Y basis the manufacturing index underperformed by 3.2% (Manufacturing index for the month of July 2011 stood at 3.1%).
   
• Consumer goods index once again, managed to remain in the green by registering a growth of 0.7% for the month of July 2012 as against 4.1% in the previous month. While the consumer durables registered a positive growth of 1.4%, the consumer non-durables just managed to grow by mere 0.1%.
   
• The capital goods index continued with its descending performance since the month of March 2012, and registered a negative growth of -5.0% in the month of July 2012 as against -28.1% (revised downwards from -27.9%) in the previous month. Low business confidence due to lack of policy reforms, below normal monsoon and relatively high interest rates this season have been weighing heavily on the investor sentiment.
   

Our View:

We believe that for the IIP data to get back on track, there needs to be action on the part of the Government in the form of reforms such as increasing FDI in multi-brand retail, FDI in civil aviation, improvement in the supply chain, better storage facilities for excess agriculture produce and make the tax policies more predictive and conducive for investments. Recently, the FDI in aviation is proposed to be tabled in the Parliament and the Aviation Ministry is hopeful of getting through with it. Such policy reforms are very important for our country to maintain its sovereign credit rating (investment grade).

As far as interest rate cuts are concerned, the Reserve Bank of India (RBI) had clearly stated its stance of containing inflation even at the cost of sacrificing growth in the medium term. Though the inflation for the month of July 2012 stood at 6.89% (within the comfort range of the RBI), the RBI may not go in for rate cuts at its upcoming second quarter mid-review of monetary policy scheduled on September 17, 2012, as signs of moderation in WPI aren’t evident and upside risk exits due to high fuel prices.

What should equity investors do?

In the backdrop of the developments taking place in the developed world, wherein the Germany (the strongest amongst the Euro nations) has accepted the ratification of Euro 500 billion rescue package under the European Stability Mechanism (ESM) albeit with conditions and the Fed considering another Quantitative Easing (QE3), the emerging markets like India may witness a sudden flow of foreign capital which will help build a positive investor sentiment in the country.

However, any disappointment in the developed world may send negative ripples to the Indian economy as well as the markets. Under such a scenario of volatility it is better to adopt a staggered approach towards your equity investments. Remember any sudden or sharp dip in the equity markets should be cited as an opportunity to invest rather than liquidating your investments.

Moreover, when adopting the indirect route to equity investing i.e., through mutual funds it is vital to 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?

Looking at the growth-inflation dynamics the Reserve Bank of India (RBI) may not go in for interest rate cuts at its upcoming second quarter mid-review of monetary policy scheduled on September 17, 2012. Apart from this, the liquidity situation too, seems to be comfortable as cited by the Deputy Governor, Dr Subir Gokarn.

Hence at present while taking exposure to debt mutual funds and fixed income instruments, one should clearly know their investment time horizon. Investors with an extreme short-term time horizon (of less than 3 months) would be better-off investing in liquid funds for the next 1 ½ months or liquid plus funds for next 3 to 6 months horizon. However, investors with a short to medium term investment horizon (of 1 to 2 years) may allocate a part of their investments to short-term income funds which should be held strictly with at least 1 year time horizon.

The present scenario also seems comfortable to look at longer horizon debt mutual funds. Thus, if you have a longer time horizon, then you can now hold some exposure to pure income funds. Since longer tenor papers will become attractive, longer duration funds (preferably through dynamic bond / flexi-debt funds) can be considered, if one has an investment horizon of say 2 to 3 years. However, one may witness some volatility in the near term as there is always an interest rate risk associated with longer maturity instruments.

Fixed Maturity Plans (FMPs) of upto 1 year may for some more time yield appealing returns and can also be considered as an option to bank FDs only if you are willing to hold it till maturity. You can consider investing your money in Fixed Deposits (FDs) as well, before the interest rates offered on them are reduced. At present 1 year FDs are offering interest in the range of 7.25% - 9.00% p.a.

Here’s your chance to listen to the expert if you have missed the WebSummit on ‘An Ideal Asset Allocation in Current Market Conditions’ by Mr Ajit Dayal. Please click here to view the repeat telecast of the Websummit.
 

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