After four years of 40 per cent plus returns from the stock markets, investors will be wondering what's in store for them this year. The big economies like the US and the UK are already on a slowdown. Even the crude oil price has hit $100. India, on the other hand, is expected to show a robust growth rate of 8 per cent in its gross domestic product (GDP).
Clearly, an Indian investor cannot look for cues from the world economies to predict what will happen in India this year. Also, the big worry is that interest rates may just continue to be high because of high commodity prices and inflation. In such a situation, the Reserve Bank of India may be forced to keep the interest rates high through different measures.
So, what should the Indian investor be doing now? For starters, prune your expectations. Says Jayesh Gandhi, lead portfolio manager, multi-cap equity, Morgan Stanley Mutual Fund, "2007 was a bumper year for investors in the equities markets, with the large-cap indices giving around 50 per cent returns and the small and mid-cap indices returning over 70 per cent.
Stocks in sectors such as utilities, energy and financials services significantly outperformed the benchmark indices. Going forward, equity returns, although pretty healthy, could be significantly lower than what we achieved in the last three to five years."
Adds investment advisor Gul Teckchandani, "In 2008, one has to follow a bottom-up approach." He advises that you should not look at companies with high price-earnings (P/E) ratios which are not justified by high growth numbers. For instance, a company growing at 100 per cent per annum can afford to have a P/E multiple of 40 or 50. But if you are looking at companies which are growing at 10 per cent and have multiples of 40, then surely you are looking to get hurt.
The main strategy of 2008 should be to look at sectors which are undervalued but have the potential to do well. Teckchandani likes companies in the polyester filament yarn, speciality chemicals, auto ancillaries and commercial vehicles. And if you have an investment horizon of two to three years, go ahead and get into the big technology companies. "Most importantly, do not lose your discipline while investing," says Teckchandani.
Of course, investment advisors are all for mutual funds as the suitable way to tap the market. "Indian mutual funds have built a decent track record in the last five to seven years. The number of products and variety of funds has also increased significantly over the last few years, allowing risk diversification with consistent returns," adds Gandhi.
For the risk averse, experts believe that investing in debt instruments and funds could be a safe haven. But remember that with the rise in the inflation rate, the returns would be negatively impacted. It is expected that debt products will continue to give single digit returns.
Other vehicles like post office savings have got a boost from the government as five-year post office deposits have now been included under Section 80C. Also, the bonus on maturity would be at the rate of 5 per cent on deposits made under the post office monthly income account scheme, taking its annual return to 8.9 per cent from the earlier 8.3 per cent.
Besides stocks and debt, property is another asset class which has been appreciating at a breakneck speed. No wonder, a lot of speculative buying has been happening. In fact the speed of price rise has been so phenomenal that many buyers, who delayed their decision to purchase, were forced to settle for smaller homes within the same budgets.
However, if you are an investor in property, 2008 could continue to give you good returns. Says Anuj Puri, chairman, Jones Lang Lasalle Meghraj, "Once real estate investment trusts (Reits) are introduced the small investor will be able to participate in the realty boom." He expects that from the second quarter of 2008, Reits should start in India.
In this year, Puri recommends investing in Navi Mumbai, because of the upcoming Reliance special economic zone (SEZ) and international airport. His other two favourites are Kolkata, because of the IT boom and Nashik, where an eight-lane highway is being built to connect it to Mumbai. Also, it is slowly becoming the wine capital of India and is likely to see a lot of action from investors. Gold is another investment vehicle that should be looked at. Commodities experts feel that it is likely to touch $900 per ounce (at present $862) in the days to come.
Thus, 2008 is not going to be a year of easy pickings. Unlike last year, when investing in a simple index fund was likely to give you great returns, this will be the year of stock picking and careful investment decisions. Look before you leap should be the strategy.