Where to invest in 2010-11

Looking For The Golden Goose
Investing in the coming year will be a story of opportunities and potential. Stay hooked:

For most, 2009-10 was a roller coaster ride. Since we live in a country where they are few and far between, the majority of people are unused to sudden ups and downs; but thankfully while there was motion sickness, few people fell seriously ill. Many even enjoyed the ride, seeing how they are coming back to the market to invest in droves.

Have investors learnt anything, though? Perhaps. Many are still staying away from real estate, for instance; the sense that prices are still too high continues to prevail among first time home-owners. Even those high net worth individuals (HNIs) who planned to buy properties as investments are going slower.

The overall economic environment is a plus: the India growth story is back on track, and external developments — barring the appreciation of the rupee’s value against the dollar — are no longer a major concern. Economic data on industrial production and manufacturing output, plus consumer demand as reflected in auto sales is optimistic. Given all of this, where are the opportunities for investors?

The Good News Bears
“The investor is at a crossroads today, where investment decisions are difficult, given the volatility in almost all asset classes — equities, debt or commodities,” says Mohit Batra, group chief executive officer at Alchemy Capital management, an investment advisory and wealth management firm in Mumbai. “Investment strategy should follow a sensible asset allocation approach that takes into account risk appetite and investment horizon.”

Batra points out that the market is trading at 22 times trailing earnings — in other words, earnings of the most recently completed financial year — and between 16 and 17 times forward earnings (next year’s earnings per share). That puts valuations at relatively high levels, compounded by high liquidity and strong rupee appreciation; it’s an assessment that many others share.



Another problem is oil prices, which seem to be hardening somewhat; the pressure it puts on the government’s fiscal position is a concern when it comes to broad market impact. Many analysts are also worrying about high inflation expectations, notwithstanding the Reserve Bank of India’s (RBI) track record at managing this effectively. A strengthening currency also highlights the downward drifting guidance of many export-oriented businesses, including information technology companies among others.

Many also expect the comfortable liquidity situation to ease. Despite all the capital inflows in the past three months — nearly $6 billion in recent weeks — some expect improving trends in the US and other western markets to reverse the trend, albeit not so much that it could derail Indian stockmarkets. “Looking ahead, people also worry about what another bad monsoon can do to economic growth prospects,” says Batra.
What Is The Strategy?

Advisors use a thumb rule for starters when it comes to asset allocation: 100 minus your age should be the percentage to put into equities. Add some debt to balance out, some investments in gold and other similar assets and you should be fine. Fair enough, but that doesn’t account for risk appetite: aggressive investors, moderate investors and conservative investors have different approaches to asset allocation.

Here’s Alchemy’s strategy that best represents the broad view: aggressive investors should put 70 per cent in equities, 20 per cent in debt and 10 per cent in gold. For moderate investors, the proportion should be 50, 40 and 10 per cent, and for the conservative types, it should be 20, 70 and 10 per cent allocation in equity, debt and gold respectively.

But what about other assets such as commodities or real estate? “Unlike other assets, commodities are not something you can buy and hold,” says V.R. Srinivasan, CEO and director at Brics Securities, a Mumbai-based securities firm. “Investors like to buy and hold assets that have a physical trait. Commodities are a hedging, not investing instrument.”

Unreal Estate And Precious Metal
Most advisors will tell you that the upside capital appreciation in real estate — unless you plan to live in it — is not as high as it used to be. “A stamp duty of 10 per cent reduces your profit potential,” says an independent financial advisor who wished to remain anonymous.

Source: SEBI, IMS Database & CNBC TV 18 Survey, Edelweiss Estimate

Buying land is fraught with uncertainty about the title, especially where documentation can be a problem. Also, open land is susceptible to encroachment. What will happen to land prices in the coming months is not very clear either. “And don’t forget that land is an illiquid asset,” says our advisor. “If you can’t sell it, it becomes a burden you can do without.”

Gold on the other hand, is always fascinating. Today, we have several exchange-traded funds (ETFs) that invest in gold; there are no gold mining companies in India. Our gold production is a poor two tons a year from the Kolar gold mine in Karnataka. There are some tax benefits too; if you buy a gold ETF, and sell it quickly, you can avoid capital gains tax by investing the sale proceeds in real gold bullion.

My World Is My Bond
Debt investment is, however, a must. There are several debt funds that can meet investor needs and you can also buy corporate debt. Many companies issue high-interest debt whose yields are also good. “In the next few months, interest rates are likely to soften,” says Srinivasan. “Yields would then rise, and if you have some high interest debt in your portfolio, it makes a nice nest egg.”

But equities still account for 80 per cent of most investors’ portfolios, and that’s where the action will be the greatest. Even for the conservative investor, there are several quasi-debt equity investments: fertiliser companies, for instance, that have stable earnings and a steady dividend payout.

“As an opportunity, there are several mid-cap companies that have great potential,” says Batra. “Especially when the valuation gap between some mid-cap and large-cap stocks is as wide as 750 basis points or 7.5 per cent, the highest in seven years. We expect mid-caps to outperform the large cap stocks.” For his part, Srinivasan echoes the now-familiar — even true — story of the domestic consumption-driven economy that India is that is the staple of analysts and commentators, and the companies that make those products.

To varying degrees, many experts agree. In the pages that follow, a dozen expert commentators present their views on a variety of asset classes — equity, debt, commodities, gold and real estate — and what investing in them could mean for building your wealth. The views expressed in their columns are a comprehensive assessment of where to invest — and where not to — in 2010-11. Enjoy!