A weak Rupee (INR) has its positives and you can profit from it. The INR touched a record low of Rs 53.82 against the US Dollar (USD) on the 9th of May 2012 before climbing higher on the back of RBI intervention, direct and indirect. RBI went and sold US Dollars and also asked exporters to convert 50% of their USD holdings into INR. RBI’s measures will help the INR in the near term but for a more fundamental improvement of the INR, the macro economic environment has to improve. Hence trade, current account and fiscal deficits will have to be brought down while inflation will have to be kept down. Policy makers have realized the importance of sound policies to strengthen the macro economy and will act prudently to stabilize the Rupee. On the whole the INR fall is actually beneficial to the economy and you can position yourself for a stronger economy going forward.
The weakness in the INR underscores the strength of the USD. The USD index has gained 7.6% on a year on year basis as of end April 2012. The USD is gaining traction due to the strength of US corporates as well as the weakness of other economies including the Eurozone, China and India. US corporates are doing well as seen in the performance of the S&P 500, which has gained 3% on a year on year basis as of end April 2012 while indices from India to Germany have given negative returns. USD is gaining due to sovereign debt issues in the Eurozone, bank lending and property bubbles in China and inflation and policy paralysis in India.
Position your portfolio to profit from a weak INR
A weak INR suggests that the Indian economy is going through a painful adjustment process. In this process there will be consolidation in sectors with the strong, healthy businesses gaining in strength at the cost of weaker businesses that have leveraged balance sheets and poor business models. The weak INR helps exporters, from IT to manufacturing and Pharmaceuticals though the geographies to which exports are made will be important. For example exporters to US will gain while exporters to the Eurozone will face difficulties due to shrinking economies in some countries.
The fall in INR helps exporters in two ways, one is pricing becomes competitive and the other is currency depreciation increases revenues in INR terms. For example if Infosys increases USD sales by 10% and the INR depreciates by 8%, growth in INR terms for Infosys will be close to 19%. Hence even a lower USD revenue guidance by IT companies will not really impact growth in INR terms.
A portfolio of export driven companies with healthy balance sheets will give good returns in times of INR fall.
The US economy is looking stronger than the other economies in the world, largely due to the resilience shown by US corporate giants from Apple to Google who have been immune to the global macro economic weakness. The ultra loose monetary policy of the US Federal Reserve (Fed) is helping the economy by keeping borrowing costs for the government and corporate sector low. The outlook for the S&P 500 index is positive going forward and you can participate in the growth of the largest brands in the world by investing in US stocks. A strong USD coupled with gains in US equity indices will generate good returns going forward.
Improving macro economic conditions due to better policies will help bring down inflation and will help bring down interest rates in the economy. Falling inflation and lower interest rates will help banks, which will gain from an increase in value of their government bond holdings and gain from increased consumer demand. A portfolio of banks that have low non performing assets can be built.
Fixed income investors can increase their duration of their investments by investing in long dated government and corporate bonds or by investing in mutual funds that invest in such securities. Falling inflation and lower interest rates bring down yields of longer dated government and corporate bonds leading to higher prices of these securities.
You must invest with a longer term perspective when the economy is going through a period of adjustment, as the process is long and painful. Invest surplus long term funds, cut out leverage, do not use derivatives and do not get too greedy and invest in speculative stocks.