Transcript of Podcast
Hi I am Arjun Parthasarathy speaking and this podcast is on “How to Invest in today’s Equity and Bond Markets? ”
The deep pessimism in the beginning of 2016 that saw the Sensex and Nifty falling to 18 months lows and government bond yields rising to one year highs has given way to high optimism. The Sensex and Nifty are trading at 11 months highs while government bond yields are trading at three year lows. Ironically, equity and bonds have rallied sharply post Brexit, which was an event that was supposed to have a deep negative effect on markets.
It is understandable that you may have concerns investing in this market where pessimism changes to optimism in a few months time, without any change in on the ground realities. Global economic conditions are not robust by any standards with Eurozone barely growing, China economy growing at below 7% levels and oil exporting countries facing deep economic hurdles due to oil prices that are down over 50% since September 2014. The domestic economy is yet to see signs of strong revival with industrial production growing by just 1.2% in May 2016 even as food prices are driving up inflation with the CPI inflation for June 2016 at close to two year highs.
How do you invest in this market? Investing at higher levels of equities and lower levels of bond yields run the risk of short term reversals in markets if optimism gives way to pessimism. On the other hand, not investing would mean losing out on opportunities present in the market where many stocks are hitting record highs on an almost daily basis while bond yields are continuing to trend down even as global bond yields stay in negative territory.
On the equity front, investments in companies that can register growth despite macro economic fluctuations will pay off well. Such companies can form the core part of your portfolio. You can also invest in companies that can benefit from cyclical upturns in the economy. Focus on companies that have improved productivity during the downturn phase. Such companies can be the satellite part of your portfolio.
On the fixed income front, the interest rate cycle is still very much on a falling trend given global lack of demand led inflation and given that India’s finances are set to improve with the government focusing on keeping down the fiscal deficit and with improved tax collections that saw a growth of over 25% in the first quarter of this fiscal year. Implementation of GST next fiscal year, stake sales by the government and spectrum auctions will also shore up finances.
Investing in government and corporate bonds directly or indirectly through mutual funds should be considered until such time that the interest rate cycle is looking to bottom out.
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