After slumping to 4.4% in the previous quarter, the Gross Domestic Product (GDP) in the second quarter of fiscal year 2013-14 (Q2FY14) has shown some signs of improvement. The GDP at factor cost with 2004-2005 constant prices for Q2FY14 rose to 4.8% from 4.4% in Q1FY14. This rate of 4.8% has surpassed the expectations of 4.5%-4.7% growth. However it is noteworthy that in the second quarter of the last fiscal year, the country had clocked a GDP growth of 5.2% and thus now with GDP having descended therefrom, there seems to be a loss in momentum and is a cause of concern.

Mining and quarrying again registered a negative growth, but this time the estimates have decelerated to -0.4% as against -2.8% in the previous quarter. Besides these two sectors community, social and personal services and trade, hotels, transport and communication grew at a subdued pace as compared to that in Q2 of last fiscal. Sectors that recorded high growth numbers were agriculture, forestry and fishing, electricity, gas and water supply and financing, insurance, real estate and business services.
 

(Source: CSO, PersonalFN Research)  

The uptick in the Q2 GDP growth over the previous quarter can be attributed to:
 

• Agriculture, forestry & fishing: The sector registered a 4.6% growth in Q2 FY14 as against 1.7% registered in Q2, FY13. The production of kharif crops such as coarse cereals, pulses, and oil seeds grew by 4.9%, 1.9% and 14.9% respectively. The impact of good monsoon has been captured well in the agricultural growth. The growth in this sector has reflected well in the GDP growth due its considerably high weightage in GDP.
   
• Electricity, Gas and Water Supply: The Electricity, Gas and Water Supply sector too has contributed to the uptick in the GDP growth by growing 7.7% as against 3.7% in the previous quarter. Also when compared to the Q2FY13 (wherein the growth in this component was 3.2%) this growth of 7.7% was even more significant.
   
• Construction: The construction industry has also been showing signs of improvement with a healthy growth of 4.3% as against 2.8% in the previous quarter. However an increase in the interest rate scenario going forward may work against the construction sector to post a strong growth as high interest rates will increase the cost of borrowing for the companies.
   
• Financing, Insurance, Real Estate and Business Services: This sector has recorded a robust growth of 10.0% in Q2 FY14 as against 8.3% Q2 FY13. Also when compared with the previous quarter (wherein the growth in this component 8.9%) this growth appears satisfactory.
   

PersonalFN is of the view that, while the Q2FY13-14 GDP has breached expectation of 4.5% - 4.7% led by uptick in agriculture, the elevated interest rate scenario amid inflationary times would pose a challenge for economic growth in the ensuing quarters of the present fiscal year. Taking cue from uptick in economic growth, the Reserve Bank of India (RBI) may be encouraged to increase policy rates further (due to persisting inflationary pressures), which may have a detrimental impact on the industry side. Fiscal deficit data has already run-up 84% of the budgeted target in the first seven months, which again is concern.

What should equity investors do?

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 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. While Q2FY113-14 GDP has surpassed the estimates of 4.5% - 4.7%, risk of inflationary pressures and fiscal deficit remain, which the markets would take note of as they tread.

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 should debt investors do?

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. While the Q2FY13-14 GDP has reported an uptick, the yields at the longer end have mounted yet again on concern over fiscal deficit.

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.

What should investors in gold do?

The supply side constraints are likely to instil premium of gold prices in India. In such a scenario, smuggling activity may resurrect (due to hike in custom duty) recognising the fact that India has an insatiable appetite and flair to own the precious yellow metal, due to various emotional and financial reasons. But investment demand may sombre (due to elevated prices), while physical demand in the form of jewellery may remain robust ahead of the marriage season. Also having witnessed above normal monsoon this year, rural demand for gold could stoke up as it means more cash in the hands of farmers who often invest mainly in two asset classes gold and land. It is noteworthy that according to the World Gold Council (WCG), gold demand in India could reach a record 1,000 tonnes this year as consumers buy for the festival and wedding season.

PersonalFN thinks that in the backdrop of the downbeat economic variables and global economic headwinds, smart investors would view gold as a monetary asset rather than mere commodity; and that would keep the long-term trend for gold intact until economic uncertainties recede.

So, one can take refuge under the precious yellow metal and add it to your portfolio from diversification point of view. At PersonalFN, we believe that, you should consider your investment time horizon and accordingly allocate 10% to 15% of your total portfolio towards gold (via gold ETFs). Gold is not an instrument to make quick money but a solid long term asset and hence you should ideally invest in gold with a longer investment horizon.
 

Add Comments