Friday Podcast 21st June 2013
Transcript of Podcast
Hi this is your editor Arjun Parthasarathy speaking.
This Podcast topic is on “Build your portfolio in this market fall”.
Equities, bonds and currencies reacted negatively to the US Federal Reserve statement of stopping bond purchases in mid 2014. The Fed sees better prospects for the US economy in 2014 and hence sees no necessity to continue liquidity infusion into the system. However the Fed will keep interest rates at close to zero percent levels until 2015 or until unemployment rate is close to 6.5%. Unemployment rate is at 7.6% as of May 2013.
The negative reaction by the markets to the Fed is short term in nature. The case for a deep and long term sell off in markets is poor. A strong US economy is good for the world as a whole as it will help pull up many other economies that have deep linkages with the US. The Fed withdrawing monetary stimulus is also good for the markets as asset bubbles will not be formed and inflation expectations will stay down. In fact if the Fed’s readings come out right on steady growth, falling unemployment rate and stable inflation expectations, the markets will be way higher than where they are trading now.
US equities should benefit from the strength in the US economy. US treasury yields will stabilize given low inflation expectations but it will lose the safe haven premium that it commanded in most of 2012. Rise in US equities coupled with stable bond yields will filter into strength in equities and bonds of emerging markets.
The Sensex and Nifty are down by over 6.5% from highs while the ten year bond yield has risen by 25bps from lows over the last one month. You should build your portfolio in this market fall. Equity investors can look to build a portfolio of stocks with strong balance sheets and healthy growth prospects. Investing in index ETFs (Exchange Traded Funds) is also a good option as it delivers index returns at low costs.
Bond investors should invest in a mix of short term and long term bond funds. Short term bond funds will benefit when the yield curve steepens on rate cuts and improved liquidity conditions while long term bond funds will benefit from a fall in the yield curve.
It is best to avoid commodity stocks and gold/silver given that the outlook for commodity prices are down on the back of paring down of bond purchases by the Fed.
The INR is the worst hit by the Fed’s outlook on the US economy and is trading at all time lows. The INR has lost close to 11% against the USD over the last couple of months. INR weakness, while negative for sentiments, is not as negative for equities and bonds. An economy that is seen as steadily benefitting from growth in the US and from low inflation expectations will see good amount of portfolio flows coming in. A weak INR can in fact draw more flows on expectations of the INR strengthening down the line.
Watch the INR but do not let it prevent you from building a strong portfolio.
Thank you for listening in. Have a good weekend.