The Index of Industrial Production (IIP) after dipping in the month of August 2013, once again reported an uptick with the data for September 2013 being placed at +2.0%. But the lull yet appeared in industrial activity with 'see-saw' movement depicted. Appealing core sector growth (which has a weightage of 38% in IIP) at +8.0% for September 2013 had nudged expectation of much better growth in IIP for September 2013 (at around +3.5%); but the data registered emanated belied expectations. Nonetheless, the growth was on account of good performance by power and mining sectors, while capital goods posted negative numbers.
 

IIP on a roller coaster

Data as on September 2013, but released on November 12, 2013
(Source: CSO, PersonalFN Research)  

An evaluation of some of the important components of IIP for September 2013 reveals the following:
 

• Manufacturing index continued to remain sombre. In terms of industries, 13 out of 22 industry groups (as per 2-digit NIC-2004) in the manufacturing sector have shown positive growth during the month of September 2013 as compared to the corresponding month of the previous year. The industry group 'Wearing apparel; dressing and dyeing of fur' has shown the highest positive growth of +29.2%, followed by +14.9% in 'Coke, refined petroleum products & nuclear fuel' and +11.3% in 'Chemicals and chemical products'. But on the other hand, the industry group 'Radio, TV and communication equipment & apparatus' depicted a negative growth of -25.6% followed by -13.0% in 'Motor vehicles, trailers & semi-trailers' and -11.5% in 'Office, accounting & computing machinery'.
   
• Consumer goods index too, after having registered contraction in the past four months (i.e. May 2013 to August 2013), recorded a dismal growth of +0.6% in September 2013. This is because; the consumer durable goods reported a negative growth of -10.8%, although non-durables exhibited a luring growth +11.3% in September 2013.
   
• Likewise, Basic goods, Capital Goods, Intermediate goods index depicted mixed performance. While basic goods and intermediate goods industries showed a satisfying growth of +5.4% and +4.1% respectively; capital goods industry recorded a negative growth of -6.8%, thereby making a trend from the previous month.
   
• However as mentioned earlier, Mining and Power depicted good performance. Mining after having shown contraction since the beginning of this fiscal year, in the month of September 2013 it expanded by +3.3%. Power fuelled a double-digit growth of +12.9% for the month of September 2013.
   

So what stance would the RBI in its ensuing monetary policy review?
The Consumer Price Index (CPI) inflation for the month of October 2013 has mounted to the double-digit terrain to 10.09% from 9.84% in the previous month. This may instil the Reserve Bank of India (RBI) to maintain its anti-inflationary stance. Inflation for a couple of months now, is likely to remain high mainly headed by food inflation as prices of vegetables remain elevated. Moreover, increase in price of diesel - which is an essential transportation fuel - is likely to put pressure on food inflation.

Moreover, the rupee has depreciated off late vis-à-vis the U.S. dollar placing it near Rs 64. Rating agencies are already signalling concern over fiscal deficit problem. Fiscal deficit has already run up to 76% of the budgeted full year target in just six month of the current fiscal year; and if any further slippage on this may not be viewed favourably by rating agencies. So, the central bank in our view would continue its vigil on inflation and may increase policy rates by another 25 basis points (bps) in its 3rd mid-quarter review of monetary policy 2013-14.


So what strategy equity investors should adopt?
The Indian equity markets, breached the all-time of the markets recorded on January 10, 2008 on the Muhurat trading day by ending at 21,239.36 points; but since then the markets have corrected and investors seem to be wary of going long and in fact are booking profits or at least breaking even in some of their earlier positions. The U.S. Federal Reserve at present has decided to continue with its stimulus (vide bond-buying worth U.S $85 billion per month) as a measure to address to slowing growth concerns. The U.S. Federal Reserve indicated that the recovery in housing had lost steam, while noting some reversal in a recent spike in borrowing costs. But this may not encourage many to go long on the markets, because it may not be too long before the U.S. Federal Reserve starts winding down its bond buying programme in early 2014.

Moreover, the domestic macroeconomic variables aren't appearing conducive. The HSBC India Manufacturing PMI for October 2013 (data released in November 2013) has remained unchanged at 49.6, the level reported in the month prior. The fall in level of production and new orders in the Indian manufacturing economy (as the business climate in India remains tough), reflects some sedation in India's manufacturing activity. While the HSBC India Services PMI rose to 47.5 in October 2013 (data release in November 2013) from 46.1 in the previous month, the data is yet under the contraction mode for the fourth consecutive month led by slower pace of activity, reduction at service providers and drop in new business placed at private firms.

Also as mentioned earlier, inflationary pressures are likely to remain in the months ahead headed by food inflation. Likewise, the risk of a rating downgrade also tends to hound as the rating agencies are signalling concern over fiscal deficit problem. India has the lowest investment grade rating and any further hit to the country's rating would increase the borrowing cost and trigger capital outflows. Standard & Poor's has already said chances of a credit ratings downgrade for India was higher than for Indonesia. Moreover, the S&P has indicated that the negative outlook maintained on India may be lowered if the Government that takes office after the general election does not appear capable of reversing India's low economic growth and put the house in order.

So give the above scenario in the domestic economy and the global economic headwinds, markets may consolidate on lack of fresh positive triggers.

Thus in the background of the above and the risk emanating therefrom, PersonalFN is of the view that investor should stagger their investments to mitigate risk, since volatility could persist. While investing in equity mutual funds, PersonalFN recommends one to opt for the SIP (Systematic Investment Plan) mode of investing, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding. However, while selecting mutual funds for your portfolio, prefer the diversified equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years. Also PersonalFN believes that your investment discipline and asset allocation would decide your success in investing.


What strategy debt investors should adopt?
While the RBI has reduced Marginal Standing Facility (MSF) twice in the month of October 2013 by 75 bps and attempted to infuse short-term liquidity in the system, the policy rates have been hiked by 50 bps in the last two monetary policy actions in a move to tame inflation. In the monetary policy review (held on October 29, 2013) to, the central bank has made it clear that inflation would remain under focus while being mindful of the growth dynamics. Thus the longer end of the yield curve (due to inflationary pressures evident and RBI focus thereon) would remain under pressure with macroeconomic concerns on inflation, fiscal deficit and sovereign rating.

So in the aforesaid backdrop, PersonalFN is of the view that, it would be best to refrain investing in longer maturity debt papers, and instead prefer shorter maturity debt papers. If permitted by your time horizon and risk appetite if you still want to invest in long-term debt funds, it would be wise to take exposure via dynamic bond funds (as enabled by their mandate they hold debt instruments across maturities). But PersonalFN thinks that given the aforementioned interest rate scenario and macroeconomic variables thereto, one should not hold more than 20% of their debt portfolio in longer tenure funds. Avoid investing in G-sec funds, as they may see high volatility and may not be an ideal instrument to yield fruitful returns. Fixed Maturity Plans (FMPs) of 3 months to 1 year period can also be considered as an option to bank FDs only if you are willing to hold it till maturity. Alternatively you can also invest in 1 year Fixed Deposits (FDs), as banks are offering interest on 1 year FDs in the range of 8.00% - 9.00% p.a. In the present scenario, it would be ideal to invest in shorter duration instruments vide debt mutual fund schemes having shorter maturity profile. Investors with an extreme short-term time horizon (of less than 3 months) would be better-off investing in liquid funds for the next 1month, or liquid plus funds for next 3 to 6 months horizon.

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