ATM :: Risks ahead, still it makes sense to invest in Indian equities

Wed, 12 Feb 2014 00:30:44 -0700 | By ATUL KUMAR, QUANTUM MUTUAL FUND |
The Union government continues with populist measures and one can expect more such gimmicks as elections draw closer

The S&P BSE Sensex during January declined by 3.03 per cent on total return basis compared with December 2013. The broader indices such as S&P BSE 200 and S&P BSE 500 fell much higher than S&P BSE Sensex.

IT and healthcare were among the sectors that gave positive returns during January while FMCG was marginally negative.

Interest-sensitive stocks such as real estate, banks and capital goods ended up prominent among the sectors having negative return.

FIIs were sellers of equity in January with a minor net outflow of $13 million. In the last calendar, FIIs invested approximately $20 billon in Indian equities. Domestic institutions were also net sellers during the month to the tune of $240 million, with mutual fund outflows offsetting insurance companies’ inflows. The rupee depreciated 1.39 per cent during the month against US dollar.

January was marked by a number of eventful global events. The most important among them was the meeting of US Federal Reserve where the decision was taken to taper further. This amounts to reducing liquidity by higher amount in the US system as its domestic outlook improves. As US reduces liquidity, there is less risk money available to flow into emerging markets such as India. Eventually, local stock prices will get impacted due to this.

The US Fed decision impacted the currency and stock prices of many countries; however India was more protected on both sides. Currency pressure on rupee has eased with domestic banks raising FCNR deposits up to $30 billion. Also trade deficit of the country has improved with ban on gold imports and pick up of exports with rupee depreciation making Indian exports competitive.

On the domestic front, RBI raised interest rates in its monetary policy. RBI has made its intention clear that it will target inflation and wants to see consumer inflation below 4 per cent in the long run. Current consumer inflation levels of 10 per cent have caused pain to the economy. The Union government, on the other hand, continues with a number of populist measures. I believe, one can expect more such gimmicks as elections draw closer.

The need of the hour is to have a system-based approach rather than discretionary powers to policy makers to have solid long-term growth in the economy.

I remain optimistic about Indian equities in the long run. In my view, the equity markets is fairly valued now on an overall basis. However, there are stocks and sectors, which look out of favour with investors. I remain hopeful of India continuing to record GDP growth of 6.5-7 per cent over next many years, irrespective of global uncertainties.

However, structural reforms are necessary to achieve the potential growth. Retail investors may do well to make allocations to equities in a regular and disciplined manner.


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