Crystal ball gazing is a difficult sport even in the best of times. As the saying goes,even the Lord misses it sometimes. With that caveat in place,let me proceed to look into my own crystal ball and attempt to outline the basic trends in 2009.
If,however unrealistically,we were very upbeat in January 2008,it is apparent that the economys vital signs are so much better this year. The Indian economy is driven largely by domestic consumption. As retail and auto sales have shown in December,domestic consumption has slowed down but still packs a considerable punch. The Balance of Payment (BoP) situation is likely to be net positive this year,just on the basis of fall in the price of crude. For every one dollar reduction in the price of crude,Indias import bill reduces by $750 million for the year. With the price of crude falling by nearly $100,the savings are going to be substantial. The fall in prices of metals also bodes well for the economy as India is a net importer of these items,and so does the decline in shipping rates. The reduction in prices of all these items is likely to be a catalyst for increased economic activity.
The negatives are also substantial. The most telling is the crisis in confidence among the captains of industry. Demand for Indias staple exports like technology services and gems and jewellery has fallen. Then there is the extreme nervousness within the banking community to provide credit to industry. Overall,however,if one were to look dispassionately,the pluses outweigh the minuses.
The governments recent policy and monetary measures are expected to provide relief. It has reduced the repo rate to 5.5 per cent and reverse repo rate to 4 per cent. With the CRR cut to 5 per cent,and similar large cuts in SLR deposit requirements,almost Rs 3.5 lakh crore of liquidity has been injected into the system. Using the leverages available to it,the government is attempting to ensure that money reaches the segments it is meant for and does not get marooned. Further,stimulus has been provided to ensure that deadlines of core projects are met and that they do not fall into a limbo on account of lack of liquidity. With the expected coming on stream of two major Reliance projects and the Cairn Energy project,the GDP is expected to increase by 2 per cent. All in all,the scope for renewed inflow of money into the domestic capital markets can certainly be expected.
Prospects in 2009
Liquid funds. The basic variable here is the inter bank rate or call rates. With banks nervousness coming down and liquidity increasing,it is not expected that call rates will move northward with any vigour. These rates are unlikely to stay significantly above 6 per cent. With short-term (91 days) debt rates also likely to stay low,average returns from liquid funds in not likely to go beyond 6.5 per cent.
Debt funds. Here the principal driver of yields has been and will continue to be the cut in rates (repo,reverse repo,CRR and SLR) by the central bank. Inflation is likely to head to 5 per cent in the short term and even lower over a longer time frame. Hence there is scope for further reduction,even after the substantial cuts that have already been made. Most of the upside in long-term debt funds and long-term gilt funds has already been factored in. It is unlikely that the sharp upside that we have seen in the last two months will continue for much longer. I do not really envisage long-term debt funds returning more than 10 per cent over the next 12 months.
Equity funds. These funds are best placed to reap benefits this year. At just ten times earnings (current year),and with a large number of the bluest of blue chip scrips trading at PEs well below this number,this is no doubt among the cheapest markets we have seen in a long time. The basic framework for a sharp spike exists. But it will take some degree of stability in the global situation,specifically in the US,for institutional investors to return to the Indian stock markets. The Sensex should at least cross 13,000 this calendar year,and with a little luck could go even higher. Thus from current levels it should not be difficult for investors to earn 30 per cent returns from equity funds.
The intermediate categories,MIP and Hybrid are also expected to offer returns that are a composite of the returns of the basic categories listed above.
So despite the current uncertainty,stay invested,get your asset allocation right,and the markets could well spring a pleasant surprise this year.
The author is a Kolkata-based mutual fund analyst.