In investing, as in life, going against the tide can often prove to be a profitable exercise. As a contrary investor, it is the ability to select and focus on certain asset classes over the others that can help one achieve better returns than one's peers.
Asset allocation involves the prudent evaluation of the principal asset classes-debt/bonds, equities, real estate and gold. A contrarian investor needs to take a different approach from the prevalent one and consider those avenues where the popular sentiment is down. He should hone his ability to identify and make the best of such opportunities. We consider some of the common avenues and the contrarian manner of investing in them.GOOD PHASE FOR INTEREST RATES
The Reserve Bank of India has hiked the interest rates six times during this financial year to control the spiralling inflation. The tightening cycle is likely to continue into the next financial year.
Given the rising rates, fixed income instruments and fixed deposits have become attractive once again. While high interest rates could temper the demand for loans and thus curtail consumption, fixed deposits could earn better returns. If one is heavily invested in equities, it would be prudent to book some profits and move a part of the holding to less risky debt instruments.
Income funds, which have also been out of favour, can be considered again. These funds invest in longterm instruments and can be invested in phases as interest rates rise. Phased investments are desirable since it is not practical to predict the exact point at which interest rates will start dropping.REAL ESTATE: ON A TURNAROUND TRAIL
In 2008, the real estate sector witnessed a meltdown more severe than that in the equity market. Property prices corrected by 20-30% across tier I and tier II cities, demand slumped and projects were abandoned or delayed.
However, the sector has finally started showing signs of a turnaround. However, as it has not witnessed a significant uptrend yet, real estate is clearly an area that a contrarian should consider. With capital inflow increasing and unemployment rates reducing, real estate is making a slow, but steady, comeback.
Property prices have stabilised and have started witnessing a mid-segment rise across most cities. This trend is likely to continue as many consumers, who had stayed away while the prices were peaking, may consider investing now. There could be only a marginal price increase now, but this can accelerate over the subsequent quarters.
Currently, one can hope to get the best bargains within this sector as home loan rates are attractively pegged. This is because of the transition to the base rate system and teaser rates that are being offered by some banks. In the commercial space too, the demand is expected to rise as companies go on a hiring spree once again.GOLD CONTINUES TO GLITTER
One instrument that has defied gravity (at least so far) is gold. It has had a dream run since the equity meltdown. Analysts have tried to trace its movement with equities and the US dollar, often emphasising its inverse relationship to these avenues.
However, this has not held true during the current trend where, in some phases, all three asset classes have moved in the same direction.
With the price of gold touching Rs 20,000 per 10 gram, it might be the right time to start booking partial profits. One can use a fall in the price of the yellow metal as an opportunity to re-enter.
|"The equity markets are close to their peaks, so book partial profits in stocks and invest the money in fixed income instruments"|
Gold itself can be a contrarian call to the equity market as investors tend to move towards this low-risk avenue when the stock market falls. So you should continue investing in gold systematically.IS IT TIME TO BE CAUTIOUS ON EQUITIES?
The equity markets are close to their peaks, so it makes sense to book partial profits. It may not be practical or advisable to completely exit stocks. However, the equity portfolio should be realigned and a few defensive sectors can be added.
A contrarian investor should also scout for options within sectors, such as realty, metals and power, which have seen limited action. However, one should ensure that the downside risk on the stock itself is low. Realty and metals are sectors that are known to crack at the first sign of a downward spiral and, hence, one needs to tread with caution.
While contrarian investing might appear to be easy, it requires study and experience. Many investors burn their fingers while buying a stock whose price has fallen, only to discover that it drops further.
On the other hand, an early exit from an investment can be frustrating as it could translate to a missed opportunity. Still, a well thought out contrarian investment strategy can net you high profits.Anil RegoCEO & Founder, Right Horizons