EQUITIES DELIVER- DON’T LOSE THE FAITH The economy seems to be firmly in the grip of a slowdown. Growth is decelerating across sectors. On the other hand, we are seeing food prices climbing higher each day. Even the weather gods have decided to be hostile this year, with near drought like conditions. Corporate earnings are certainly slowing down, though the stock markets seem to have done very well this calendar year, so far. A weakening rupee, stubborn inflation and a central bank (RBI) that is reluctant to drop interest rates. All these do not portend well for investors. The stress on the populace is showing. The first sign of a troubled economy is the signs that the savings rates have started to fall. This is a sign that rising prices are forcing people to save less. An optimistic way of looking at this falling savings rate is to say that people are not slowing down the spending. I would carefully watch the sales trend in big ticket items like durables, automobiles and two wheelers. So far, people seem to be unconcerned about slowdown and are buying. Interest rates hopefully should start to fall. High interest rates are hurting corporate India badly. Profits growth has come down to single digit and threatens to go negative in terms of growth in this fiscal year. All the asset classes seem to have done well, indicating the easy money availability with investors who are happy to take risks. Of course, the FIIs and the LIC of India have also pumped in decent amounts in to the markets this year, so far. Equities have given good returns and so have fixed income. Gold took a breather, scaring off many late entrants and seems to have resumed its climb. Of course, a depreciating rupee has added its own kicker to the momentum. Many foreign investors have lost in dollar terms due to the strength in the dollar as well as the weakness in the rupee. All indications are that the dollar is likely to gather further strength as troubles dog the Euro zone with no solution in sight. Politically, this seems to be the worst of times since independence. Everything seems to be in a stagnation zone as the ruling party and the opposition trade charges and totally neglect the populace. Policy making has ground to a halt. The slim hope is that there is certainly a better man at the Finance Ministry in terms of capabilities. Infrastructure spending seems to be a thing of the past. In this context, I would certainly advise people to take some money off equities and put it in to either income funds or bank deposits. Of course, for those in direct equities, there will always be opportunities and it is likely that over the next twelve months or so, attractive bargains may be available. I am bullish on gold, so long as it is a small part of your overall asset allocation. Not on any intrinsic valuation, but purely taking a view on global fear and a weakening rupee. SIP returns (assuming termination in first week of august 2012) were as under: 5 year returns 4.66% 10 year returns 13.53% The above is for the NIFTY ETF. However, if you were in HDFC Top 200, the returns would have been 22 percent plus for ten years and over ten percent for five years. Clearly shows that a well managed equity fund delivers great returns. Yes, you have to be lucky and choose right. Over half the funds did worse than the index. I am not endorsing Top 200 or any other fund, but using it merely to show that your choice of a fund can make a significant difference to your final corpus. Clearly, a pointer that equities will give you modest returns over long term so long as you make investment a steady habit and eschew looking at prices daily. Of course, the returns will look higher when the termination is in a good phase like the present. Termination in a bad market will naturally mean worse returns. So, it is all a question of timing. Maybe it makes sense for an investor who is near his last leg of investing through the SIP route, to keep tabs on the returns and when he sees returns in excess of 13 or 14 percent on a compounded basis, close it out and put it in to a liquid fund. This will offer some protection against getting whipsawed by a poor market. For example, if I have been saving in equities for the last couple of decades and am in my seventies, with no further commitments, I should keep an eye on pulling out money from equities and moving it in to fixed income products. If I have direct equities, the objectives would be different. Of course, it all depends on how rich I am at that point in time. Ideally, I should not need that money in equities during my lifetime to sustain my daily needs. This year, there is a lot of hope left in the market. The biggest hope is that the interest rates will start to fall off. This will help us in two ways. One is that whatever we have invested in income funds or in bonds, will give us a capital appreciation as rates fall. The second is that it will signal an improvement in corporate earnings apart from an improvement in relative attractiveness of equities as opposed to fixed income. Keep your faith in equities alive. That is the only hope that we will either beat inflation or minimise our loss of capital.