The economy and the markets look at the future. Why have they not risen is something which comes to the mind. Primarily because the growth rates earlier are a function of Low base effect.
Despite Covid impact the income tax numbers seem to rise at a good pace. This data is payment of taxes and hence is cashflow. If we do not trust government data Bank credit is something which can be looked at reliably on a relative basis. Why? Primarily because Bank Balance sheets after the IBC Code do not lie. Earlier there was restructuring which was perennial in nature. This has brought in the right sense of governance and accountability.
Services Credit data is at 19.6 per cent from 10.2 per cent for the April-December 2022 period . This has been on the back of improved nbfc offtake which is a sign of the broader economy. Personal loans grew from 14.9 per cent a year ago to 20.2 per cent as per RBI Credit data which comprises of housing and vehicle loans.
IF Credit is growing at this rate 7 per cent GDP growth appears to be achievable. If so therefore a nominal GDP growth of 11 per cent as envisaged by the government appears to be on the lower side of the possible. Capital expenditure by government has the potential to lift animal spirits and there the government has focused on quite enough. A 33 per cent rise in Capex was not expected by anyone.
If you are an investor it is time to rejoice and identify what has worked for you and examine the trends thereof which show the future in subtle signs scattered across the markets ears. Let us examine the major asset classes
1. EQUITY
Growth in equity happens with a disciplined approach at the fiscal side. The government thankfully has maintained fiscal discipline. This ensures that the borrowing would not be excessive and under control implying growth in nominal GDP to be expected as a normal trend. Current account deficit is an issue therefore maintaining this fiscal discipline math is even more critical.
For a large part of our population Bharat is an agrarian economy. Irrigation seems to move at a steady pace and takes its own time. Couple of years back crops under cultivation were close to 40 per cent.It takes a decade to reach the golden number of 60 per cent after which our dependence on the Rain Gods reduces. Regardless of the monsoon situation with 60 per cent irrigation the incomes are steady. The government also has been doing its bit by way of interventions from a crop choice point of view and guiding farmers on the same. This has happened in some parts of the Country like Uttar Pradesh.
A normal monsoon is critical for a rural driven India at least till 2030 till irrigation finds it feet. Overall equity is likely to deliver in the region of 10-15 per cent per annum on a 3-5 year time horizon.
For a growth portfolio around 60-70 per cent needs to be in equity and equity oriented
opportunities. For an income portfolio around 30-40 per cent in equity oriented opportunities
and maybe some selective equity picks for the long term. For the short term positional trades
as well as derivative ideas can be considered for some part of the portfolio as markets are in
a tight range.
2. Fixed Income
The fate of fixed income is driven by the Federal reserve which in turn depends on the geopolitical situation. It is difficult to forecast, however supply chain issues raise the cost of credit and at the same time create margin pressures. This has already been witnessed by the equity fall in the US Markets. That said institutions are looking at fixed income overseas as the rates are rising. Those with a floating rate loan in the US would do well to reduce debt exposure by reducing their loans for homes and the big cars.
The Japanese are likely to maintain a dovish stance given the state of the economy prevalent there. This view helps in maintaining the equilibrium in the world. Why is it critical? It is important as both buyers and sellers are needed for US Debt securities. It hinges on whether personal real income rises in the US. So far that has not shown signs of increasing. Also the unemployment rate needs to be tracked for at least 6 months before a sign of recession can be confirmed.
India has good policies and has not used its discretion as a Central Banks overseas to print currency as one of the fundamental tenets of economic management to at least prevent a crisis of going out of hand. Our country follows the US and may go ahead with rate hikes slowly. Core inflation is still high and that is why the RBI did increase rates. Core inflation for those not in the know is all inflation excluding food and energy.
The rate rises are good for senior citizens and people looking at income generating portfolios. Income portfolios are seeing reallocation of debt. Our recommendation in this space ranges from overnight funds which are parked for a day to low duration funds. This would result in lesser volatility in debt and build stability in the portfolio. On the debenture side our obsession with safety continues and we look at AA+ to start with.
For a Income portfolio short term is the safest place to park funds in. if looking at growth through Debt it would be prudent to wait till rate cuts start happening. It is not expected for the next 12 months.
Alternates
One needs to be careful while investing in alternates. There are three categories :Category 1,2,3.Our view is to look at the listed space. Even the unlisted debt does not seem to make sense as it reminds of the Franklin Templeton Fiasco.
In the listed space a mix of Long short funds as well as Long only funds can be considered. These deliver in the region of 9-12 per cent on a post tax basis over the long term. Outperformance is driven by derivatives calls and a mix of leverage in an optimal manner. Tax treatments are on the basis of the highest tax slabs.
Model Portfolios look like the ones below
1.Growth
Equity-15 per cent
Equity oriented opportunities -60-65 per cent
Trading - 10 per cent
Alternates/Debt - 10-15 per cent
2.Income
Equity oriented opportunities – 30-40 per cent
Alternates - 10-20 per cent
Debt - 40-50 per cent
Trading - 5-10 per cent
For people in the income phase Trading can be tried with small sums if there is a gap in the income.
This is a year where long term patience will be rewarded. Seize the Day!
Author:
The forewords have been given by Motilal Oswal,MD,Motilal Oswal group of Companies,Shailesh Haribhakti ,Chairman- Shailesh Haribhakti & Associates, Madan Sabnavis -Chief Economist, Bank of Baroda.
In his foreword Oswal says “One of my favorite line in the book is” Focus on what is in your control”.
Haribhakti mentions”Anirudh has written an excellent selfhelp book on financial planning and personal investment.”
Sabanavis says”I ‘m sure that as a reader most of the questions you may have on savings will be answered in this book”.
Carpe diem
Read the book here - https://notionpress.com/read/design-your-destiny