Q3 GDP slips again, but all is not lost
Feb 29, 2012

Author: PersonalFN Content & Research Team

The third quarter Gross Domestic Product (GDP) numbers once again have shown weakness in India’s economic growth. Q3 GDP growth for the fiscal year 2011-12 mellowed down further to 6.1% from 6.9% posted in the last quarter. Moreover, the GDP growth numbers for Q1 and Q2 of FY 2010-11 have been revised to 8.5% and 7.6% from 8.8% and 8.9% recorded previously.

(Source: CSO, PersonalFN Research)

The slowdown in the Q3 GDP growth can be attributed to:
  • Manufacturing growth: Manufacturing showed a meager growth of 0.4% as against 2.7% in the previous quarter. The manufacturing sector has been slowing down due to the anti-inflationary stance adopted by the RBI to curb the inflation menace. However, of late the RBI has put brakes on its rate hikes in the light of slowdown in the economy.
  • Mining and quarrying: The mining and quarrying sector has put up a dismal growth. Q3 FY2011-12 growth stood at negative -3.1% as against -2.9% in the previous quarter. This murky performance of the sector can be attributed various policy logjams and environmental issues.

However, all is not lost. Within the GDP numbers the construction sector has shown improvement and has posted a robust growth of 7.2% from 4.3% in the previous quarter. Apart from construction, the other components of the GDP like electricity, gas & water supply; trade, hotels, transport & communication; financing, insurance, real estate & business services and community, social & personal services have shown resilience (with some of them posting robust growth too).


Our View:

We believe that the current GDP growth numbers for India are better than those posted by the developed nations. The Indian economy has shown its resilience time and again. The inflation bug has started cooling down, so has the food inflation. Also, the RBI has hinted at interest rate cuts going forward which will ease the borrowing costs further. Moreover, the easy monetary policy followed in the developed markets may turn to be beneficial for us in terms of foreign capital flows (The Government should aim at attracting more of FDI rather than the FII).


What should equity investors do?

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, 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 consolidate at these higher levels before they start going down.

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 3 months to 1 year can also be considered as an option to bank FDs only if you are willing to hold it till maturity, but you may not have a very attractive post tax benefit as indexation benefit will not be available on FMPs maturing within 1 month. 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 February 29, 2012) it is $1,785.6 an ounce - which indicates that price of gold has gone up by 56 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. Moreover, with the present festive demand and marriage season, the precious yellow metal is bound to accelerate its further. At PersonalFN, we recommend that you should have a minimum of 5% - 10% allocation to gold, and invest it with a long-term time horizon of 10 to 20 years.

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