Instability in stock markets, future looks positive

With instability on both domestic and global fronts, MONEY TODAY-Value Research Lifestage Model Fund Portfolios have suffered of late, but the future appears positive.

Print Edition: April 2011

The tsunami and the earthquakes in Japan shook markets the world over in the second week of March.

The Indian markets were no different with the Sensex and the Nifty shedding 1.7% each during the week. The instability continued during the third week of March as well. The Nikkei nosedived nearly 11% as the crisis escalated with a nuclear meltdown. Taking cues from the tumbling Asian markets, Dalal Street too, continued to trade lower. Looking at the present situation, there is concern in domestic markets that the Japanese might pull out their investments which, experts believe, could act as a direct trigger for a correction.

  • The fourth-quarter result of the manufacturing sector will start coming in by the first week of April, 2011.
  • The movement of crude oil will be decisive in giving directions to the markets.
  • If the inflationary pressures continue to remain strong, there is a possibility of another rate hike by the central bank.
The rising crude oil prices and uncertainty in Libya further aggravated the nervousness among investors. However, there was some relief on the domestic front. The January industrial output growth, as measured by the Index of Industrial Production was better than expected and stood at 3.7% compared to 1.6% in December. Further, food inflation eased a bit and fell to 9.5% as compared to 11.05% in February, but it still remains a concern.

The performance of the Lifestage Portfolios also suffered with the markets. Two of the equity-oriented portfolios delivered negative returns. The Wealth Maximiser with 80.9% of the portfolio in stocks gave a return of -2.9% while the Money Builder with 71.1% in equity delivered a negative return of 2.3%. Looking at the Wealth Maximiser portfolio, the biggest losers were-Sundaram BNPP S.M.I.L.E and IDFC Premier Equity Plan A-which lost 12.5% and 5.7%, respectively. The above-mentioned funds are mid-cap funds and in volatile markets mid-cap and smallcap stocks suffer the most.

The portfolio has top equity holdings of 18.45% in the financial sector. Though the sector has given around 20% return in the last one year, it has seen a correction since the beginning of November 2010. The RBI mid-quarter monetary policy review on 17 March brought some disappointment for this sector. The central bank raised the repo and reverse repo rates by 25 base points each to 6.75% and 5.75%, respectively.

"The move indicates continued concern from the RBI about rising inflationary expectations. As manufacturing inflation has increased from 3.8% in January to 4.9% in February, the RBI is trying to address the spill-over of inflationary expectations from fuel and food to broader items. We believe the RBI is nearing the end as far as tightening of rates is concerned," said Sailav Kaji, director-institutional equities & chief strategist, Padmakshi Financial Services.

The portfolio also has 12.9% of its equity funds allocation, in the energy sector. The oil marketing companies have corrected nearly 30-40% since October 2010, in line with the rise in crude oil prices. However, according to Religare Capital Markets, current valuations suggest that most of the negatives are already priced in and that the situation is turning favourable, with limited downside even if crude rallies another 5-10%.

The Stable Growth portfolio did not show any growth while Income Generator gave a decent return of 3.7%. Though the long-term perspective on the portfolios remains strong, if the current uncertainty persists they will continue to suffer.

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