2014- HOLD YOUR HORSES
2014 does not look very exciting, from an investment perspective. The focus of the world seems to be more on what is referred to as ‘tapering’ and what the implications are. In India, the tempo will build up to the coming general elections in the middle of the year. The global economy looks as shaky as before, except for the surge in liquidity everywhere.
2013 is ending with our stock market indices at near all time highs. However, the indices hide the fact that the markets have become extremely polarised. High quality has become unaffordable from an investment perspective and poor quality stocks are now catching up. The mid caps are still way behind their highs. Banks are sitting on record levels of doubtful credit and ways will be found to change the label.
PSU stocks seem to have found more scepticism as the government seems to be helplessly torn between populism and inactivity on the economic reform front.
Politics has become very predictable. Irrespective of what happens at the centre, there is unlikely to be any big change in the economic outlook or policies. If the UPA goes and NDA comes, we can expect no better. Every reform measure has been opposed by the NDA in the current term and should they come to power, do not expect anything different. It is only the ‘expectation’ of change that could provide some altitude to the markets.
As 2013 draws to an end, the inflation linked bonds are being launched. A welcome initiative, but with a lot of ifs and buts about the tax implications a full throated endorsement to invest is not possible. It may be good for those in the non tax-paying bracket. The moot point is whether they have money enough to invest. A small asset allocation to the bonds would be useful, should there be an undesirable coalition that will push inflation through the roof. Should a third front take charge at the centre, expect mayhem on the financial markets.
I would keep my liquidity intact. I do not see many great investment opportunities in equities at the present juncture. I would keep my eyes peeled for any event based price action that could bring some good stocks to a buying level. The stock markets did not do much, if we measure point to point. However, the volatility threw up a lot of opportunities. If one had discipline to have a laundry list of stocks to buy, at prices that provided some safety, 2013 provided many opportunities in quality stocks and some select mid caps.
Gold had a terrible year, though Indian investors were cushioned to a large extent by one of the sharpest annual depreciation in the rupee.
2014 is going to be interesting. The Chinese New Year in 2014 will herald the beginning of the “Year of the Horse”. The stock markets clearly personify that. We all know that one horse will win, but no one knows at the start about which one it is going to be. If we look at corporate earnings, the first two quarters of 2013-14 have been the worst in over a decade. One way to look at it is that things can only get better from here.
Foreign exchange earners are going to be the preferred choice for 2014. IT for sure looks good. Avoid the trap of falling in to commodity exporters or rice, jewellery etc. Capital goods are best avoided, though there could be a selling opportunity once the new government comes in to power. I clearly do not see government finances being able to afford populism and development expenditure out of its budget. Our fiscal position is not all that great and the impact of government freebies is going to be severe in the years to come.
Look for companies with no debt, steady domestic market and reasonably clean management. Do not increase allocation to equities or re balance etc simply because the year is changing. Asset allocation should also be a function of relative price to value of assets. Do not spend time worrying about ‘tapering’. It is more important to see whether the company we choose will make more money or less money and with what level of certainty.