Samvat 2074: Equities may see roller-coaster ride, debt & gold may shine

Samvat 2073 has ended on a positive note with Sensex gaining over 16%, but the next 12 months could test the patience of investors. Perched atop all-time highs for the Sensex, valuations are posing uncomfortable questions and experts believe benchmark indices in the initial part of the Indian calendar year will come under pressure if earnings do not recover in sync with expectations. The capital protection virtue of debt or fixed income seems alluring and the gold theme if played via gold bonds can also add meaningful stability, fund managers say.

Equity outlook

Going ahead, in Samvat 2074, many equity investors expect the government to focus on effective measures to accelerate economic growth. Post the implementation of the GST, there are signs that the business is coming back on track. Fund managers maintain their positive bias towards domestic infrastructure and cyclical sectors over the medium-to-long term. IT and pharma are also important themes that could play out well, even as consumption linked stocks are projected to trade at rich valuations and still deliver. Key monitorable risks are geopolitical concerns globally, a decline in foreign inflows, sharp currency movements and a spike in oil prices. "All-in-all, we expect returns in Samvat 2074 to moderate in view of weak near-term earnings growth and higher than average valuations," said Teena Virmani, vice-president - PCG Research, Kotak Securities. The impact of GST implementation on trade and supply chain will be important in the forthcoming earnings season – any indication of prolonging of GST pain will impact FY18 earnings estimate. "Expect the market to remain in a range, albeit with higher volatility as we enter the 2QFY18 earnings season," pointed out Yogesh Mehta, VP- Retail Research, Motilal Oswal Securities. A range-bound market isn't good for investors who seek profit from arbitrage.

Debt outlook

Debt avenues have given 6.5-9% return in Samvat 2073, but in the new year, the asset class' outlook continues to be dependent on the inflation outlook. The Indian debt market is almost at the end of the interest rate cycle, which started in January 2015 with the repo rate at 8%. RBI has since then cut benchmark rates by 200 bps. The 10-year G-sec has corrected from 9.1% in April 2014 to 6.45% currently. "At the current juncture, we are of the view that inflation (Read CPI ) is not likely to breach the target set by RBI and hence do expect 1 more rate cut maybe before FY18. Till then expect yields to trade range bound and incremental need to determine yield trajectory going forward. The short end of the yield curve to remain supported due to adequate liquidity in the banking system," said Lakshmi Iyer, chief investment officer (debt), Kotak Mutual Fund. Investors who like to play debt through MFs have to be selective. " G-Sec funds or duration funds should be avoided. Credit opportunities funds with stable asset quality offer the best investment opportunity in the current market environment," said Sachin Jain, analyst, ICICI Securities. Any increase in fiscal deficit remains the most critical risk to sentiment towards fixed income.

Gold outlook

If equities are going to be wobbly, then gold could be a tactical refuge. Even as gold trades at Rs 29,500-30,000 per 10 gm level, bullion experts feel retail investors should allocate more to the precious metal. "It is the right time for a retail investor to consider Gold as a strong investment vehicle as equity markets are nearing an overbought region...If we compare the precious metal with booming IPOs, Gold may lose out on statistics in short term of say, one quarter but in long run gold may provide equally good returns with the added advantage of higher liquidity in the physical market," said Arpit Jain, AVP at Arihant Capital Markets. Gold ETFs are an easy way to play gold, but gold bonds provide a safer route.

"These bonds are issued periodically, and their value rises with gold value. They also provide an extra assured interest of 2.5% per year," says Anil Rego, CEO, Right Horizons. Given the current macroeconomic scenario, many expect downsides in gold to be capped and prices to move up gradually albeit with increased volatility.

"We reiterate that the real positive trigger for gold would be when the market expects Fed to be unable to normalize monetary policy and see it reverse its course at first signs of crisis. The fallout of the geopolitics globally seems to now cap the downsides in gold," Chirag Mehta, senior fund manager – alternative investments, Quantum MF, said.