When stocks shine in contrast …

A disappointing year for gold and real estate, which are investor favourites

December 29, 2014 12:24 am | Updated 12:30 am IST

In many respects, 2014 has turned out to be a year of unexpected twists and turns for Indian investors. The stock markets, which began the year on a lacklustre note, delivered big gains despite the mid-year uncertainty of the Lok Sabha elections. By the last week of December, the Sensex and Nifty were up by about 30 per cent each and mid- and small-cap indices had done much better, with 50 and 70 per cent gains, respectively.

With RBI’s interest rates remaining high, bank deposit-holders continued to earn 9 per cent plus on their investments. Investors, who took a brave call to buy debt mutual funds, especially long-term ones, were rewarded with returns of 13 to 16 per cent, as these funds made the most of rising bond prices.

Yet, it was a disappointing year for both those Indian investor favourites in recent years — gold and real estate. Gold prices fell 7 per cent in rupee terms. Data from the National Housing Bank until June showed real estate prices remaining flat in 9 cities and declining in 5 of the 26 cities it tracks. Given the tendency of most forecasters to go with prevailing trends, market experts are now predicting yet another good year for stocks and a dull year for gold. They expect real estate to chart a gradual recovery. But investors may like to weigh the following factors before they take the predictions at face value.

Stock markets

Leading foreign and Indian brokers have put out Sensex targets between 32,000 and 33,500 for December 2015. That translates into a 20-22 per cent return from present levels of over 27200. It is clear from these numbers that even bullish market participants expect stock markets to deliver lower returns in 2015 than they have done in 2014. Given that the initial leg of any bull market usually witnesses the highest returns, it is best not to expect stock markets (or mutual funds that invest in them) to deliver an encore in 2015.

There are three factors that may contribute to this. One, stock prices are driven by growth in underlying corporate profits.

The current Sensex and Nifty valuations assume that corporate profits of Indian companies will grow at 15-18 per cent for the next few years. Yet, they have grown far more slowly in the last six years. Between 2007-08 and 2012-13, Sensex company profits grew at an annualised 7 per cent. In the last two years, the growth has picked up to 14 per cent. But stock prices have run ahead of this growth, anticipating further improvement over the next few years. If these don’t materialise, markets will find it harder to push higher.

Two, liquidity, or the amount of money chasing Indian stocks, has just as much influence on stock prices as corporate performance. Predicting Foreign Portfolio Investments (FPI) flows is a tall order. But after their record investments into Indian markets in 2014, there is a possibility that FII flows could slow at least in the first half of 2015. Falling oil prices could result in some of the oil-rich nations which run sovereign wealth funds, withdrawing from the markets. The unexpectedly strong U.S. economy, along with a rising dollar, could attract FPIs to the U.S., instead of emerging markets.

Market direction, therefore may depend on whether more retail investors, or domestic institutions put faith in Indian equities.

Three, even if blue-chip stocks manage good gains in 2015, the outlook for mid and small-cap stocks is quite clouded. With a lot of retail and domestic mutual fund money chasing these stocks in the last few months, they have in many cases turned pricier than those for blue-chips. For these stocks, 2015 could turn out to be a rocky year.

Debt markets

With official inflation numbers falling well below RBI targets, there are now widespread expectations that RBI will begin to cut interest rates in 2015. The timing is uncertain, but the rates are expected to fall by 25 to 50 basis points.

The markets, as always, have already pre-empted this fall. The benchmark 10-year government bond, which was yielding 8.7 per cent in January and peaked at over 9 per cent in April has since fallen sharply and hovers at barely 8 per cent now. This fall, apart from helping companies (the top quality ones) borrow cheaper, has seen a few banks begin to trim their own deposit rates, pre-empting RBI’s rate cuts next year. With banks facing margin pressures, further cuts appear likely.

This argues for savers to lock into prevailing fixed deposit rates both with banks and NBFCs, for a 3 to 5 year period, as this could well be the peak of the current interest rate cycle.

Falling market interest rates have also handed an unexpected bonanza to debt mutual funds who stocked up on long-term government securities and bonds. As rates fell, the older bonds have been much in demand and have lifted the net asset values of these funds.

In 2015, as official interest rates fall, liquid and short-term debt funds will deliver lower returns, while long-term debt funds may outperform them. But debt investors, like equity investors, should brace for a choppy ride, given that FPIs are now quite active in Indian bond markets too.

Gold

If the years from 2008 to 2012 proved to be exceptionally good for gold (it delivered 20 per cent plus returns), 2013 and 2014 have proved to be quite lacklustre. The metal has declined by 7 per cent in each of these years in Indian rupees. Traditionally, investors have bought gold for three reasons — for use as jewellery, as a store of value because it beats inflation, and as a safe haven because it performs well when other assets don’t.

Recent shifts in global markets have undermined two of these three reasons for buying gold. As crude oil and most other global commodities have gone into free fall, inflation around the world is rapidly moderating. This is true in India as well. Therefore, investors who hoarded gold as an inflation hedge are now exiting it.

Gold’s ‘safe haven’ qualities have also been eroded with the strong rebound in the US economy. With the dollar looking up, central banks and institutions no longer have solid reasons to hold gold as a ‘safe haven’. They would rather hold the dollar.

For Indians, significant rupee depreciation was another reason to hold gold until last year, but that too is no longer a factor. This argues for buying gold in 2015 only if you fancy buying jewellery as a consumer good, just you would buy a car or an LED television.

Gold may take more than one year to regain its sheen as a great investment.

aarati.k@thehindu.co.in

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