Struggling to keep itself afloat, the Index of Industrial Production (IIP) for the month of April 2012 managed to post a positive growth of just 0.1% from -3.2% in the previous month. Moreover, the growth of for the month of March 2012 was revised upwards to -3.2% from -3.5% estimated earlier and for the month of January 2012 revised downwards to 1.0% from 1.1% estimated earlier.

Since December 2011, the IIP growth has been struggling, thereby signalling a slowdown in the Indian economy. This manifestation of slowdown by the Indian economy may cajole the RBI in reducing the key policy rates at its upcoming first quarter mid-review of monetary policy 2012-13 scheduled on June 18, 2012.
 

IIP growth manifests weakness in the Indian economy

(Source: CSO, PersonalFN Research)

 

The IIP growth for the month of April 2012 was affected by the following:
 

• Manufacturing index, which constitutes about 76% of the industrial production, displayed almost a zero growth (0.057%) in the month of April 2012 as against -4.1% in the previous month. The poor performance of the manufacturing index was somewhat covered-up by the low base effect (of April 2011) otherwise it would have been difficult for the manufacturing index to rise above the negative terrain.
   
• Consumer goods index however, managed to put up a good show by registering a growth of 5.2% for the month of April 2012 as against 1.2% in the previous month. Both the consumer durables and consumer non-durables registered a positive growth of 5.0% and 5.4% respectively.
   
• Last but not the least; the capital goods index continued its lacklustre performance by registering a negative growth of -16.3% in the month of April 2012 as against -20.3% in the previous month. Low business confidence due to lack of policy reforms and politics weighing over economics have been weighing heavily on the investor sentiment in the country.
   

Our View:

In our opinion the IIP growth for the month of April 2012 could have been more worse had it not been for the low base effect of April 2011. Such a lacklustre performance really calls for a drastic step to be taken by the policy makers. The RBI too, may be enticed to give a push to economic growth by easing policy rates at its upcoming first quarter mid-review of monetary policy for 2012-13 scheduled on June 18, 2012.

Conducive business environment, clarity in various laws, actionable policy reforms and a strong flow of long term foreign capital is required for the Indian economy to get back on high growth trajectory.

What should equity investors do?

The global economy is still not out of the woods, though a bailout of $125 billion has been received by Spain, it is a temporary relief and not a permanent solution. Moreover, with the U.K. showing signs of a double-dip recession and a chance of "Grexit" happening, a Lehman-like situation cannot be ruled out. If we assess the economic growth for the complete Euro zone, at present it is dismal and the latest Purchasing Manager Index (PMI) data for May 2012 does not have sunny picture to portray. It is noteworthy that the final data of Markit Euro zone Composite PMI has hit near-three year low in May 2012 at 46.0, down from 46.7 in April 2012 - signalling steepest rate decline in manufacturing and services output since June 2009.

The Indian Government at present is pinning hopes on southwest monsoons and fall in prices of Brent crude oil to revive economic growth; but they are also of the view that there’s little headroom to stimulate the economy. Monsoons are progressing in a very sluggish manner, and with scientist and Indian Meteorological Department expecting "El Nino" phenomenon developing in August 2012 along with weak anti-cyclonic upper circulation, it could suppress rainfall.

Hence taking a holistic view, the Indian equity markets are expected to undergo turbulence amid gloomy global economic outlook and slump in domestic economic growth. In fact a correction of about 5% - 10% cannot be ruled out. But having said that, we think these are appealing levels to start investing in the Indian equity markets in a staggered manner. Recognising that we may experience volatile times until more clarity is disseminated on "Grexit" and Bankia bailout, we recommend 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 (preferably which adopt value style of investing or the opportunities style of investing) which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.

But when investing in 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?

Well, we think that the current situation is attractive to take exposure to debt mutual fund instruments as interest rates are likely to go down gradually over the months.

Hence at present while taking exposure to debt mutual funds and fixed income instruments, one should clearly know their investment time horizon. Since short-term rates may be still high in the near term (in mid-June) and then ease due to liquidity infusion, you can benefit from being invested in mutual funds having exposure to shorter maturity instruments. Hence 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 month 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 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. 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% - 9.25% p.a.

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eskimointexas@att.net Jul 24, 2012 How is he making the case for mutual funds when the words, mutual funds did not come out of his mouth? This guy on the phone put his money in a single stock from a tip while doing absolutely no homework on his own. Dave Ramsey sees people like this all the time, and he knows this man is incapable of investing in single stocks, because he won't do the necessary research. Dave knows it's absolutely a waste of time to give these people any other advice then diversification.

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