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What investors want to know?

The days of heady returns on most assets are over for now. We advise you on where to invest.

By Dipen Sheth        Print Edition: June 14, 2007

We have had three rocking years, but what now? From Brazil to Kazakhstan, from Egypt to Australia and from China to South Africa, new economies are shaping a globally integrated economic progress of a type that has never been seen before.

The first world is not exactly slowing down either. The US, Europe and Japanese economies are adapting rather well to the manufacturing “shift” as well as the commodity uptick. Rather unexpectedly, they have delivered sustained returns to investors across asset classes.

India, along with China, Russia and Brazil, is one of the pin-up models of this brave new emerging economic order. West Asia, notwithstanding the unrest in Iraq, Afghanistan and Lebanon, has only benefited from the oil price rise and has strengthened its position as a hotspot of wealth and prosperity.

But even as the world’s economic ship gets more wind in its sails, there are concerns about the sustainability of this new economic order. Protectionism is rearing its ugly head in the US, new governments are taking over and trying to please citizens in the UK and France (and, closer home, in Uttar Pradesh).

Private equity funds are paying huge sums to buy out entire businesses and there are renewed fears about global warming and environmental degradation. So should you remain invested or take your winnings off the table? That is the challenge investors around the world are faced with today. We have been riding unprecedented returns, backed by solid economic fundamentals. Equities, bullion, commodities, property and even art have become multibaggers.

The disappointing (but genuine and humble) answer is: I’m not sure whether the party can continue. I’m not saying that the markets are going to tank next week. All I am trying to say here is that it is impossible to predict the future with more than average reliability. And in the wake of all-round prosperity, it’s easy to get carried away and claim that nothing can go wrong.

So, as a risk management technique, take some money out of the most “frothy” or volatile stuff and look for stability. What does this mean in terms of asset allocation? Simply this: keep about 30-40% cash handy. Last week, I bought a 183-day bank deposit for 10.25%. That’s cash in six months, while I figure out what to do…

Better still, if you want to think for a year, you can park this 30-40% into fixed maturity plans (FMPs) that have exposure to fixed tenure debt. And yes, put nothing into real estate right now, unless you find a real bargain. It has had the best run among asset classes and looks like it might come off its recent highs. With the remaining 60-70%, invest equally across debt and equities.

Given the current levels of the stock markets, back sectors and companies that are solid, rather than the ones where dreamy possibilities exist on paper. Chase safety (and not just sexiness) right now. In the world of Indian equities, it’s not too difficult to find this safety.

Consumption as a theme is solid enough to last for decades in this country. FMCG, retail, telecom and retail finance are the natural proxies for the consumption theme. The safer stocks here seem to be Nestle, Gillette, RCom and HDFC Bank. Entertainment and media seems too frothy right now to merit inclusion, but the obvious poster boys should at least be mentioned: ENIL (Radio Mirchi), TV18, Zee, Adlabs and Inox. The problem with this sector is the unpredictability with its products (content). Today’s hit is tomorrow’s misfit and there’s nothing that tells you about a company’s capability in creating hit content. To this extent, pure distributors such as Inox, Shringar and PVR are more predictable.

Another theme that offers solid prospects is the power sector’s long awaited ramp up. If even half the proposed addition to generation, transmission and distribution capacity happens in the Eleventh Plan, we are sitting on the biggest expansion in this sector in the history of independent India. That’s five straight years of guaranteed growth. High-pedigree players who will share this pie include Bhel, Siemens, ABB, Tata Power, Areva and Crompton Greaves. My personal favourite is Areva T&D, whose high-decibel pronouncements in the recent past lend weight to the theory that its parent is finally taking the Indian market very seriously.

You might have noticed that there’s no mention of IT. Sounds anti-national to give infotech the shove, but there are at least two reasons why IT might actually underperform from here. The obvious one is, of course, the strengthening rupee. And the hidden factor is the terrible shortage of manpower in this sector. This shortage can spook the sector’s growth. If you must still own an IT stock, buy your safety with TCS or Infosys.

Also conspicuous by their absence from this list are sectors like oil and gas, metals and mining, automobiles, pharma, textiles and banks. Many companies in these sectors are arguably well poised to outperform in the foreseeable future. But it’s pointless trying to put together an inclusive portfolio strategy right now. It’s just not the right time for stock picking—we are more concerned about risk management. Maybe you will miss out on some big opportunities, but what the hell — you’ll sleep better!

In this issue, MONEY TODAY discusses retail investment options in depth. There are specific suggestions on stocks, funds, real estate, insurance and fixed return instruments. These should help you modify your strategies. Plus, you will meet six ordinary investors and see what helped them stay on track. Market environments keep changing and different assets offer different returns at various stages of the economic cycle. But the principles of asset allocation and investment remain the same. Once you understand this, it is psychologically easier to generate returns — whatever the stage of the cycle and whatever your preferred asset-mix.

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