A BALASUBRAMANIAN
The Year Gone By – 2019
The year 2019 has been a unique one for the markets, marked with unprecedented volatility in both equity and debt asset classes. It was a challenging year, both for the economy as a whole and in particular for the mid and small-sized companies. While equities saw turbulent ride all through, the Nifty & Sensex both hit their new highs during this year only. The year also went through one of the toughest scenes around the credit market, with several downgrades going up each passing day. First time in the history of the Indian financial market, the number of downgrades from AAA and AA, both in number and value were higher than historical standards. Though the credit crisis had deepened during this period, it also marked a recovery with many key credit issues getting resolved.
Deviation of returns between Nifty and Mid & Small Cap indices continue to see a divergence in performance on the back of global emerging market ETF flows towards Nifty stocks and thus boosting the only handful of companies that are heavily weighted in the index. Tax collection, in general, was not up to expectations, both in direct and indirect taxes, thus leaving a potential gap in the fiscal. Having seen these challenges, the silver lining came in the form of a rate cut and consequently a reduction in lending rate combined with good liquidity. Forex flows helped in shoring up the Forex reserves to its historically high levels and it also resulted in abundant liquidity in the money market space. Oil price staying low, rather stable also helped in keeping the inflation under control. Lastly, good monsoon widespread across the country was a welcome relief to the struggling economy and also prospects of the rural economy in general.
Moving forward to the year – 2020
There are indications that slowdown in economic growth has seen the bottom and we might soon turn onto the growth path, albeit slowly and steadily. Interest rate reduction, combined with liquidity will increase the pressure for banks to step up their lending in the ensuing months to earn better income compared to their current lending, either in the overnight market or lend to RBI or keep the investment in short term papers. This is a sense will make bankers/lenders realise the importance of stepping up their lending activities, thus improving the credit growth in the industry.
Government’s close monitoring and engagement with market players to address the current slowdown in the economy will keep market expectations intact as we move forward. As it happened in the case of Corporate Tax cut, which not only brought India at par with global economies, it also provided much-needed sentiment boost to the capital market. Similarly, the budget scheduled in February 2020 may also give many surprises both in the form of tax cuts, as well as steps to revive the confidence in the economy. Post budget one might even see pick up in investments by corporates, especially overseas entities in certain sectors like Electronics, Defence etc. With a recent amendment to the IBC regulation, we should see more progress in the IBC resolutions, thus addressing the issue of rising NPAs in the banking system. In fact, in 2020, one could expect write-backs of some of the losses booked by banks and financial services industry players. This can improve the capital structure of banks and also improve the credit delivery mechanism.
Given the number of green shoots and the policy actions announced, we believe that the worst is behind us. We will have a cyclical though gradual recovery, and hopeful of a broader market recovery soon. This is likely to be driven by – lower interest rates, bottomed out NPL cycle for banks, leading to a fresh round of lending, fiscal measures aimed at the demand side, narrowing of corporate spreads, and growth revival in rural India. We believe that the lower raw material prices and the corporate tax cuts this year will lead India Inc. to significant EPS upswing in following quarters, leading to a much needed and awaited fundamental driven recovery. Driven by lower rates and moderate inflation, we expect debt markets also to do well.
Pertinent to focus on asset allocation as a starting point
Coming to Mutual Fund investors, it will remain pertinent to focus on asset allocation as a starting point. In a world that goes through so much disruption in many areas, predicting certain movements in the market is going to remain tough. At the same time investing for the future will also remain a top agenda for both Mutual Fund money managers and investors. With these positive cues and taking in to account the present market context, we hope that you evaluate your asset allocation (equity and debt mix) basis your risk appetite.
We as a Mutual Fund have been successful in building the SIP way of investing as one of the best ways to chart one’s financial future. Going forward too, SIP will continue to see their popularity, however, it is prudent to use this tool to spread across equity and fixed income schemes. Getting the right balance between these two is critical to creating long term wealth. To give more clarity to investors, we have our product offerings bucketed into four categories that address the asset allocation needs. They are Savings (invest through a liquid fund), Income (invest through fixed-income funds), Tax Savings (met through ELSS schemes) and Wealth Creation (investing through equity funds with a mix of active and passively managed funds). By bringing this discipline in asset allocation, irrespective of market movements and its returns, one can build a peaceful portfolio to fulfil long term individual needs. We as a Fund House have also been promoting SIP with the added benefit of a life cover to meet the investors need for protection as well. On these lines, we are also creating awareness about SIP-SWP, wherein one can build their SIP portfolio (also using the benefit of Step-Up SIP) up to a period and post that period withdraw the same amount in the form of SWP which is nothing but systematic withdrawal plan. Returns at times may not be up to the satisfaction of investors, but staying invested for a longer period is important. Investment returns do bounce back with one or two favourable market conditions.
Hope the year 2020 provides the necessary positive twist to Indian Economy in general and the financial market participants in particular.
The writer is MD & CEO, Aditya Birla Sun Life AMC Limited
