Plan your investment in the next one year

It seems that returns from equities is a distance dream however gold and silver are at record highs and inflation is eating into fixed-income returns; now maybe as good a time as any to rethink your asset allocation.

While overall asset allocation should be a function of age and financial goals, equities are expected to emerge as outperformers over the next 12 months, according to experts.

Locking in returns at high interest rates would help get reasonably decent returns in the fixed income space, while gold is being advised as a hedge rather than a major component of a portfolio.

The stock market has outperformed after a year of underperformance in recent times. This trend is expected to repeat itself with a bounce back in the next year.

 A correction in oil prices is good for the Indian economy and one could expect significant returns in equities over the next 12 months.

The Sensex, an index whose movements represent the state of the markets for the Bombay Stock Exchange, was up 81.03% in 2009 after falling 52.45% in 2008.

It has fallen 3778.15 points, or 18.42%, since January this year.

Goldman Sachs put out a report on August 8 with a one-year target of 6600 on the Nifty, the benchmark for the National Stock Exchange. 

This implies a 28.76% upside from Tuesday’s closing level of 5125.75 on the Nifty or 16730.94 on the Sensex.

On the fixed-income side, experts said a peaking of interest rates bodes well for locking in returns in fixed deposits or investing in debt mutual funds.

Under the present circumstances it is advisable to invest in debt mutual funds as against fixed deposits as they are more tax-efficient.

Also, dynamic bond funds could be expected to do well over the next one year as they are best placed to take advantage of the change in interest rate cycle.

Investing in a fixed deposit one year ago would have given you a return of 7.25%, today it gives 9.25% before tax.

Debt mutual fund returns could give higher, with some experts predicting double-digit returns of 10%-13% over the next one year.

Gold and other precious metals have had a great run over the last one year.

The yellow metal returned 40.13%, while silver has more than doubled (102.44%).

Analysts do not expect the same stellar performance now, unless there is a repeat of the global uncertainty that resulted in people fleeing to the safe haven.

Precious metals would be better off as a hedge than a major part of one’s portfolio, experts said.

Precious metals could be expected to give returns of 2-3% over the prevailing inflation rate. One should allocate 10-12% of investible money to the category.

On Tuesday, gold was trading at Rs26,155 per 10 grams and silver at Rs60,145 per kilo, according to data from the Bombay Bullion Association.

Cash with investors at a 30-month high

Cash holdings with global investors touched their highest levels in the last two-and-a-half years following a drastic fall in risk appetite on fears of recession and slowdown in corporate earnings.

A global fund manager survey carried out by Bank of America Merrill Lynch last week suggests cash balances rose to 5.2% — the highest since March 2009 and just a tad below extreme levels seen during previous downturn in December 2008.

Even so, investors remain bullish on emerging market (EM) equities.

Despite the shift away from risk, EM allocations remain remarkably stable and EM has become the single overweight region for global investors.

A net 27% are overweight EM, down slightly from 33% last month. The improving outlook on China can partly explain stable EM allocations.

Among the sectors preferred, EM investors continue to like consumer-oriented sectors with consumerdiscretionary and staple the biggest overweight. 

The cyclical sectors like energy and materials are big underweight.

The income effect and demographics effect along with less impact of slowdown on these stocks works in favour of consumer staples and consumer discretionary sectors like FMCG, pharma and two wheeler automotives.

According to survey, the most favoured markets among EM investors are Indonesia, Russia, China and South Africa (+13).

India remains among the least favoured despite the correction. For India, inflation has been a concern and there may be slowdown in earnings in the near term as well.

However as and when commodity prices come down, we would see inflation cooling off and pause in monetary policy tightening. One needs to keep an eye on oil prices.