Market Mantra- November 2013.
– Vishal Dhawan, Chief Financial Planner, Plan Ahead Wealth Advisors.

The Indian economy continued to display mixed data points. The GDP growth rate numbers at 4.8%, whilst disappointing, were better than consensus estimates. Similarly, the second quarter results by a large portion of corporate India turned out to be better than estimates. Essentially, these are the benefits of a low level of expectation and the pessimism around India that had analysts and commentators fearing the worst.

One of the big positive signals for the economy has been the lower estimates on the current account deficit ( CAD). The CAD was a major contributor to the INR depreciation which further impacted inflation negatively. The trade deficit, the primary driver of CAD, has been on a downtrend in recent months. Both the finance minister’s and RBI governor’s recent projection for CAD are in the range of USD 55-$60 billion, against the earlier estimate of $70-90 billion. This is likely to keep the rupee stable, though there may be a little pressure if and when the Fed decides to taper aggressively.

Domestic Equities : The BSE Sensex lost close to 1.8 percent in the month, although it touched the all time high close of 21239 on November 3, 2013. The CNX Midcap outperformed the BSE Sensex by gaining close to 2 percent.

US Equities: The Dow Jones and Nasdaq gain close to 3.5 percent and 3 percent respectively.

Although FIIs continue to invest in Indian equities at a steady clip, retail investors continue to stay away from equities. At this stage, equities seems to be an attractive investment option from the long term perspective due to the following

  • Long term growth fundamentals along with easy liquidity situation has led to strong foreign institutional interest in Indian equities

  • Headline valuations slightly above long term averages, but reasonably priced

  • Elections unlikely to create a long term impact

As you can see from the data below, elections have normally not had any major longer term impacts on equity returns, and we would therefore not worry too much about who forms the next government.

Date Of Election Result New Government In Power 1 year S&P BSE Sensex returns before Election Result(%) 1 year S&P BSE Sensex returns before Election Result(%) GDP Growth Pre Election Year(%) GDP Growth Pre Election Year(%)
21/06/1991 Congress 70.15 130.65 5.53 5.48
09/05/1996 BJP 15.18 2.03 7.57 4.05
06/03/1998 BJP -4.32 -1.60 4.05 8.46
06/10/1999 BJP 60.89 -12.88 6.18 3.97
13/05/2004 Congress 82.38 19.48 7.94 9.28
15/05/2009 Congress -29-95 39.60 3.89 10.54

On Fixed Income:

10 Year Government Security yield lost close to 4.5 percent as it has been trending higher, above 9 percent after the credit policy on October 29, 2013.

The annual consumer price inflation quickened more than expected to 10.09 percent in October from 9.84 percent in September, driven by food and fuel prices. WPI Inflation rose to 7% in October from 6.46% in September. Hence, it is expected that the RBI may once again raise the repo rate in the coming monetary policy review which is currently at 7.75 percent. Source :

Source : Bloomberg, DSPBR Mutual Fund

The above chart of the closing level of the benchmark 10Y government bond yield makes a compelling case to
invest in benchmark 10 Yr government bonds at a yield above 9% level.

    • Number of total observations: 2,512
    • Number of days when 10Y yield closed above 9% level: 37
    • Average YTM in the last ten years: 7.48%
    • Mean YTM in the last ten years: 7.74%
    • Mode YTM in the last ten years: 7.91%
  • It is worth noting that the benchmark 10Y government bond yield has closed above 9% level only on 37 occasions out of a total of 2,512 trading sessions in the last ten years – i.e. 1.47% of the time!

 

Thus, adding long term bonds to portfolios through either tax free bonds or long duration bond funds can be considered with a 18 to 24 month horizon.