As the inflation rate moves up, key market indices are spiralling downward. Is there a way of making sure that your portfolio is not affected by this rising rate? As far as your existing holdings are concerned, we suggest that you do nothing for the time being, going by the market adage, “when in doubt, sit it out”. When it comes to fresh investments, however, make sure you look at the sectors and companies that are relatively insulated from wider market and economic movements. R. Sree Ram finds that the IT sector and pipe manufacturers are likely to be good bets. Our columnist Dipen Sheth looks at the sectors that are expected to take less of a beating—healthcare, consumer goods, infrastructure and capital goods. Finally, Narayan Krishnamurthy explores the options for investors in debt and fixed-income instruments in this scenario and looks at the choices before senior citizens, possibly the worst hit segment of the population.
The Indian equity market is going through one of its roughest patches ever. Equity indices have been in a free fall over the past few weeks; the benchmark Sensex has lost 32% since the beginning of the year. Worse, most of its component indices have done equally badly— the BSE Realty Index lost 62%, while the BSE Automobile Index fell 35%. Strangely, there is some good news. Not all sectors and industries have been hit by the rising rate of inflation. We take a look at a couple of sectors that have managed to do well regardless of the state of the economy.
Information technology
Stay away from...Auto: Rising interest rates on loans are keeping some buyers at bay. High input costs, especially of steel, leaves no headroom for pricing power, especially when sales are shrinking Banking: Rising inflation will drag down consumption and the slowing economy is likely to dampen credit growth Real estate: Problems are largely on the funding front. Apart from this, potential buyers are deferring their buying decisions in light of high mortgage rates and depleting property values Utilities: The long gestation period for project implementation has left companies vulnerable to cost escalation |
The IT sector is expected to register a sequential growth of 7-8%. While on the face of it, this might not seem like a hugely attractive rate, it’s virtually irresistible when most other sectors are reporting a sequential decline in earnings. “The Indian IT industry is driven by international demand. It has nothing to with domestic inflation or any of the domestic factors,” says Ravi R., IT analyst at Karvy. Large-cap stocks such as Infosys Technologies, Tata Consultancy smaller ones like HCL Technologies and Rolta India are regarded as good bets in this sector. Analysts expect the IT industry to witness a fresh influx of orders after September as bigger clients have delayed due to tight liquidity conditions.
Pipe manufacturers
The high prices of crude have worked in favour of line pipe companies such as Welspun Gujarat, Jindal Saw and PSL. These companies manufacture pipes that are widely used to transport crude oil, and are well-positioned to explore the robust investments being made in extracting and transporting new crude (and now, gas). “With crude oil prices hitting $140 a barrel, tremendous investments are being made in the oil and gas sector,” says Chintan Mehta, analyst, Asit C Mehta. The order books of most of these companies are full for the next year. On the cost front also, pipe manufacturing firms are in a position of strength as they lock in raw materials at pre-set prices when they receive the orders.
 |
Right now, Dalal Street is in the throes of capitulation. And any stock, howsoever sound its fundamentals, is vulnerable to this. The very people who found nothing wrong with India’s economy are suddenly prophesising economic doom. Their favourite country is buckling, as it were, under the pressure of high oil prices, gut-wrenching inflation, tight money and loose coalition politics.
So how do we invest in these troubled times? Sellers are hammering the living daylights out of bad, average and absolutely wonderful stocks day after day. And yet, this is exactly the kind of opportunity that deep-value investors fantasise about. We should be happy. Respectable frontliners will soon be available at half the valuations that dubious mid-caps once used to command. This is the time when absolute value becomes compelling and easy to find, when good to great businesses get sold for a song and when “investing for the long term” becomes feasible instead of just being a catchy slogan.
That’s why I think we can unearth a few nuggets of hope under the mountains of despair. We can actually become sensibly greedy when others are fearful, perhaps idiotically so.
But first, the bad news. There’s no denying the trouble, and it’s serious. The oil-induced fiscal deficit, the global meltdown of asset prices in the face of ever-tightening money supply, worldwide inflation, the slowing down of investment and growth as well as the paralysis of governance in an election year in India.... Commodities continue their upward spiral, while hardening interest rates squeeze out profits and kill credit demand. India’s virtuous economic cycle is seriously threatened, it seems.
The good news is that the bad news is widely known and acknowledged. By which I mean that there’s little by way of additional nasty surprises that are likely to come up in the foreseeable future. This is, therefore, an excellent time to identify some investing themes to steer troubled portfolios out of the current turmoil. The only caveat I can think of is that the market can continue to dither (and test our patience) even after the bad news flows out completely. Or that the results over the next few quarters will be far worse than feared. And, of course, something “big and devastating” might happen out of nowhere, but that’s a standard risk we run even during better times.
Infrastructure & capital goods
No matter which party comes to power, there is universal agreement on spending more on roads, transport networks, irrigation, dams, power plants, transmission networks, ports and airports. The obvious proxies to gain from this spending are L&T (down 60% from its peak), Punj Lloyd and Nagarjuna Construction. For the gutsy contrarians, it’s deep discount season in cement, as Grasim, Ambuja, Madras Cements and India Cements crash to oneyear lows. And let’s not forget the once over-owned capital goods stalwarts like Bhel, Suzlon and Welspun Gujarat.
Safe haven-seekers can find solace in industry-leading, cash-rich multinationals like Esab India, SKF India, ABB, Areva T&D and FAG Bearings, which are all going at less than half their recent peaks.
Consumer goods and services
Most Indians are currently fighting a losing battle against inflation. So who’s going to spend more? India’s more than a billion people, that’s who. This sea of humanity is growing daily, and aspiring for a better life. Remember, India and China are possibly the last two mega-clusters of humanity that are still to achieve even the basic consumption levels by “western” hemisphere standards.
So, spending is bound to continue. FMCG leaders such as HUL, Nestle, Glaxo Consumer, Castrol, Asian Paints and Britannia offer safety plus growth. Unlike the capital goods and construction sectors, you may not get serious capitulation here. In fact, these stocks are seen as safe havens and might actually rise during some of those gut-wrenching days when the market is raining lower circuits.
Apart from consumer goods, telecom rings hope in spite of falling ARPUs and tighter margins, simply because prices are falling for consumers and many, if not most, costs are also falling for operators. I’d vote for scale in this high fixed-cost industry: Bharti and RelComm score over Idea-Spice and Tata Teleservices any day.
Media stocks offer renewed hope after crashing from their overhyped valuations. Possible candidates: TV18, Adlabs, Zee, UTV Software, Deccan Chronicle. But I’d wait for better (read, worse) times to buy most of these worthies.
Healthcare
Pharma companies have swung back in favour even as the rest of the market has tanked over the past six months. Given the industry’s complexity, it’s difficult to comprehend the changing prospects and predict earnings growth with any confidence unless one is a full-time pharma analyst. Still, it looks like the best is yet to come for Indian pharma companies as they battle innovators, step up their generics presence and move up the value chain in contract research and manufacturing (CRAMS).
Divi’s Labs, Dishman and Jubilant are CRAMS leaders with several years of growth prospects in the pipeline. Ranbaxy’s promoters have sold out to Japanese innovator, Daiichi. Sun Pharma is playing out an interesting battle with Israeli generic player, Taro.
Finally, it’s possible to dig for value in the “more injured” spaces like energy, banking, power and metals. But given the fresh waves of selling on the street, I’d much rather wait for a “final capitulation” in these sectors, which will give me a chance to make a short-list of even more investing ideas. For times that will seem even worse than today. Wanna bet?
Dipen Sheth is head of research, Wealth Management Advisory Services. He can be reached at dipen@wealthmanager.ws
Is your money keeping pace with inflation?
• If your horizon is six months to 1 year and you prefer liquidity, look at long-term floating-rate funds with an average maturity of six months, or short-term bond funds • If liquidity is not a priority, look at fixed maturity plans, but remember that to get the best from these, you must stay invested till maturity; for double indexation benefits, stay invested for 13 months or more • Look at balanced or closed-end hybrid funds only if you’re not too risk-averse and are willing to stay invested for over a year |
Predicting interest rate movements is a dicey business. But the reason so many people try doing this is that these interest rate movements can significantly influence fixed-income funds. Banks and debt markets will be among the first to feel the impact of the RBI’s hike of the repo rate to 8.5% and CRR to 8.75%. This has serious implications for your debt fund investments because when interest rates rise, the prices and NAVs of debt funds tend to fall.
Says Santosh Kamath, head, fixed income, Franklin Templeton India: “Investors should focus on short-term floating-rate funds or FMP and ultra-short bond funds. If you are looking at the next six months, opt for floating-rate funds as these reduce the impact of interest rate volatility. This is because they invest in papers that carry floating interest rates. With the market expecting tight liquidity in the banking system and a not-sopositive credit pick-up in the immediate future, floating rate funds could help tide over the uncertainty.”
Some liquid funds invest largely in repos, reverse repos and collateralised borrowing and lending obligation (CBLO) papers. Popularly known as call or cash plans, these schemes have a lower average maturity than even regular liquid funds. For the next six months, these may be your best bet.
If you’re looking at a six-monthto-one-year investment horizon, your choice widens. For instance, if you are seeking liquidity, opt for long-term floating-rate funds with an average maturity of six months. There are also short-term bond funds, which are riskier than floating-rate funds, and invest in shorter duration corporate debt papers. If liquidity is not a matter of much concern, you will do well to consider fixed maturity plans (FMPs). “These schemes invest in debt papers and hold them till maturity, thereby negating the interest rate risk. Therefore, it pays to stay invested in them till maturity,” says Ajay Bagga, CEO, Lotus India Mutual Fund.
Further, FMPs bring in an additional double indexation benefit if you stay invested for over 13 months. You can then indicate lower gains on paper and reduce the tax outgo on the profit made in this investment.
If you are looking for a time horizon of over an year and a tinge of equity, consider MIPs, balanced funds and even closed-end hybrid funds. These instruments hold most of their debt securities till maturity, but they have mitigated the interest rate risks to a certain extent by reducing their maturity period in recent years. It’s important that you decide on your liquidity needs before investing in these funds, as they might prove expensive to exit before maturity, especially the closed-end hybrid funds.
Latest FD rates | ||
| Banks | Maturity | Interest rates |
| Kotak Bank | 1 yr to less than 2 yrs | 9.5% |
| ICICI Bank | 590 days | 9.5% |
| SBI | 1 yr to less than 2 yrs | 9.5% |
| Bank of India | 1 yr to less than 2 yrs | 9.25% |
| Union Bank of India | 400 days | 9% |
| Source: Bank websites | ||
When uncertain about investment decisions, it’s safe to park your idle cash in a combination of liquid funds and short-term floating-rate funds. These funds invest in short-tenured papers and usually mature within three months. Since they are not required to mark-tomarket their portfolio, they are less subject to market volatilities. The average category return of liquid funds with a maturity of just above 3 months (as on 30 June) was about 7.53% annualised.
Whatever you decide to invest in, it’s important to know that new bonds come to the market with higher yields than the existing bonds. These are more attractive than the existing comparable bonds with lower yields. In order to sell the existing bonds, investors are likely to reduce their prices to make them equally attractive. Generally speaking, the prices of long-term bonds are more sensitive to changing interest rates than short-term bonds. Similarly, fixedincome funds with longer average maturities tend to be more sensitive to interest rate changes than funds with shorter average maturities.
Remember, the key reasons to own fixed-income funds don’t change with interest rates or market conditions. In addition to providing monthly income, these are also an important component of a diversified portfolio. As the bond and stock markets often behave very differently, fixed-income funds can play a key role in helping to reduce the impact of stock market volatility on your overall portfolio. Besides, bonds historically have been less volatile than stocks, reason enough to include them in your portfolio.
Pensioners suffer a double whammy—price rise coupled with diminishing income.
A kilo of atta cost you around Rs 12 in 1994; today, it is close to Rs 30. Almost every commodity, including rice, vegetables and milk, has been hit by rising prices. While everyone feels the pinch, it’s the worst for those living on a fixed pension: their income remains static while the outgo shoots up. That’s why retired people worry so much about the rate of inflation.
Most retired people look for cash flows from safe investments that act as monthly income plans and keep pace with inflation. However, periods such as these can offset the best-laid plans. Though it’s a matter of concern and worry, there is little one can do except keep track of one’s investments and cash flows.
Experts suggest you re-look your portfolio and consider returns as well as fixed-interest payments. This means investments that beat or meet inflation. This might expose you to some risk, but the only other option is to erode your capital. Diversify your retirement corpus so you are protected from inflation and don’t face the unhappy situation of outliving your assets.
• Break up your retirement corpus and invest about 20% every year over a 3-5-year time-frame. This will grow and build on the corpus
• Park 50-60% of the money in FDs that offer 10% plus return
• Ladder your fixed deposit maturity to cushion interest rate risks
• Invest 10-15% in short-term debt and FMPs
