The Hindu Business Line : Investors must look beyond a one-year period

Global investors are positive on emerging markets, India in particular given the expected superior growth of these economies over the next few decades.

K. N. Sivasubramanian, Senior Portfolio Manager - Equity, Franklin Templeton.

K. N. Sivasubramanian, Senior Portfolio Manager - Equity, Franklin Templeton

Economy outlook: The Indian economy appears to be entering into a higher growth trajectory. GDP growth was in excess of 8 per cent during the first half of the current fiscal, with non-farm growth well over 9.5 per cent. With non-farm GDP growth expected to be strong, normal farm activity following adequate rainfall could boost overall GDP growth.

The recent strong economic growth places India among the fastest growing economies in the world and key drivers, such as investment led by corporate India and infrastructure spending, increased consumption driven by positive demographics and global outsourcing, are expected to sustain this growth. The economy is at an inflection point and helped by the right policies, the current growth rate can be easily sustained and bettered.

Equity outlook: One year is too short a period to invest in equity. There are too many imponderables that could affect the direction of the market during short periods and given the recent sharp rise, increased volatility could continue over the near term. Global energy prices, interest rate movements in developed economies and impact on global liquidity, along with the pace of reforms, would be key factors over the near term. From a medium- to long-term perspective, the outlook is optimistic, given the strong fundamentals on economic and corporate fronts. Improved demand for goods and services across sectors should lead to better profit growth for corporates.

Global investors are positive on emerging markets in general and India in particular given the expected superior growth of these economies vis-à-vis the developed economies over the next few decades. This combined with a further increase in domestic inflows should help the equity market.

FII interest: Inflows in 2005 have been in excess of $10 billion, a record for the Indian markets. A major reason for this is the difference in expectations — investors in developed countries have relatively lower return targets compared to domestic investors. Given the positive outlook for the economy and the markets, we believe that global investors will continue to find India an attractive story on a relative basis. In an increasingly globalised world, labour and capex arbitrage opportunities are expected to benefit emerging economies such as India.

In the coming years, the US is unlikely to be the world's sole growth engine and developing countries (especially in Asia) are likely to drive global economy. Slow growth in the developed economies means that economies that rely on domestic demand and are growing fast, offer better investment opportunities and have a better chance of attracting new capital.

Retail participation: The last few years have been a watershed for Indian markets, as domestic flows into equities (directly and through mutual funds) moved up sharply. While this has been partly due to buoyancy in the markets, there has been a sea change in risk perceptions and recognition of the key role equity can play in achieving one's individual goals.

Course of action: The investment strategy and asset allocation of an investor should not vary from year to year. Investors should draw out an asset allocation plan based on their risk profile, time horizon and financial goals, and not on expectations of market movements during a short period. They have to consider investments within an overall financial framework based on the above-mentioned parameters. Once the plan is in place, the key things to watch while investing in mutual funds are:

Track record and experience of the fund house

Stability of the investment team and investment process

Consistent performance across market cycles

Transparency and service levels

Relative performance among its peer group (across time periods)

Investment style/process (whether it suits the investor's risk profile)

Given the strong fundamentals of the economy and corporate India, investors with a medium to long-term horizon could consider allocating higher amounts to equity. In fundamentally strong and growing economies, equity provide higher risk-adjusted returns over longer periods. Overall, investing through the systematic route would be ideal for investors as it will inculcate discipline and makes market volatility work for them.

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