Have you been undecided when it comes to investing in financial assets? If yes, it is time to reconsider your investing strategy. Investors now, more importantly than ever, could consider investing in financial assets thanks to the burgeoning potential of the Indian economy, in an otherwise uncertain global economy.
Of the many visible trends for an investment outlook, a clear policy direction on the macro-economic front is the one which favours financial assets the most. For the last three years, the Union budgets presented have laid enormous emphasis on fiscal prudence without compromising on the outlay for infrastructure investment. The latest budget allocated about 03.96 lakh crore toward expenditure on infrastructure, particularly on railways, roads, airports and power transmission, among others.
As a result, the budget has set course on the road of sustained economic growth. At the same time, due to the tight rein on fiscal deficit, budgeted at 3.2 per cent of GDP, interest rates in the economy are slated to be low, which helps lift financial assets. Due to the lower interest rate environment, corporate investment activity is likely to resume sooner or later. Also, consumption is robust and infrastructure assets can attain faster break-evens. So, in the next few years, corporate profitability can be robust, boosting company earnings and, consequently, shareholder returns.
Also, the GST will be a game-changer as it should increase the tax receipts in the hands of the government. India’s low tax-to-GDP ratio, at 17 per cent of GDP, is likely to climb due to the GST. This move is likely to aid the government to further bridge fiscal gap and provide more resources for investment.
PHYSICAL ASSETS SEEMINGLY OUT OF FAVOUR
With inflation under control, at less than 5 per cent (consumer price index), investors have almost no incentive to invest in physical assets to beat inflation. And, it is likely that inflation may continue to surprise on the lower side. When it comes to real estate investments, the government has reduced interest-cost-exemption limits on property purchased, which reduces the incentive to invest in real estate.
Meanwhile, the outlook for gold does not appear conducive because the current account deficit is likely to hold below one per cent. This keeps the external account balances steady, which in turn means that the rupee is likely to be stable. In fact, the rupee has been strengthening lately, thereby casting a long shadow on the outlook for gold.
This sets the floor for an investor to consider being overweight on equities now. This is because, historically, it has been observed that equity assets can begin to move before earnings growth kicks in. Also, returns on equity are likely to come before earnings growth because financial markets tend to anticipate such possibilities in advance.
GO OVERWEIGHT IN FINANCIAL ASSETS
We believe that even while it seems like the price-earnings ratio may appear to be high in the present market environment; the trend shows that this ratio could further rise. Even though the chance of an upheaval on the domestic front appears remote, one cannot rule out global tailwinds, leading to market volatility from a near to medium term perspective. Hence, for investors, large-cap- and multi-cap-oriented funds remain an attractive bet for long term. When it comes to investors who are averse to volatility but wish to participate in equity market, they can consider dynamic asset allocation funds. Such funds are structured in a manner that the investor has exposure to both debt and equity, thereby allowing access to capital gains from the equity portion while debt provides the much required cushion from volatility. This not only ensures positive investor experience, but also superior risk-adjusted returns.
In fixed income space, we believe the RBI being cautious with monetary policy is a constructive step for the fixed income market from a medium term perspective. Given that RBI’s target on inflation is 4 per cent, we see an extended fixed income cycle, since the real rates in India are still high. Therefore, we consider it an opportune moment to consider fixed income once again. Dynamically managed fixed income products are recommended during volatile times in debt market space. However, global tailwinds of volatility cannot be ruled out.
Shah is MD and CEO of ICICI Prudential Asset Management Company.