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Time To Move Away From Physical Assets

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Increasing growth rates and softer commodity prices bodes well for financial assets such as equity and debt
 
The good news concerning financial assets in the next few years is getting better and better. On the equity front, stock markets have registered decent gains in the past year. In fact, last year at around this time, valuations were attractive in the equity space; now strong surges in cyclicals, mid, small, and large-cap defensive companies have pushed up valuations near their long-term averages. Hence, equity markets are solidly in the fairly-valued zone. 
 
After the low growth rates in the economy, all macro-economic indicators point to an economic upswing in the next few years. The stable current-account deficit, downward-drifting inflation, steady Indian rupee and swelling forex reserves are some of the encouraging signs of an economy on the mend. 
 
On the policy front, the government has proven it's committed to fiscal consolidation with diesel-price deregulation being a positive step in easing fiscal pressures. Besides, the commodity super cycle is over now with major commodity prices slipping such as crude oil and metals. It should further ease the inflationary pressures in the Indian economy and input costs of corporate in the coming quarters.
  
Inflation, one big challenge for the last few years, seems finally on course to come off. The anchoring of inflation expectations due to the RBI's tightening and easing commodity prices are helping tame this crucial indicator. This in turn with macro-economic improvements and fiscal prudence could see interest rates reduce in the next one or two years. 
 
Besides, the economy's steady momentum of the past few months augurs well for growth in equity prices and should drive EPS expansion. Earnings growth of the Sensex is likely to come at a solid 20 per cent for the next two financial years FY 15-16 and FY 16-17. 
 
Besides, as demand picks up gradually in the next few years, there's good scope for rising capacity utilization, driving up operating profitability. An interest-rate cut in the next few years should boost credit expansion and corporate profits. In fact, banking, infrastructure and public-sector units look attractively valued for the long run. 
 
On the contrary, the characteristics of a classic equity market peak like double-digit industrial-production growth and lower inflation and interest rates are a long way off. Therefore, this market rally has yet much steam left and is a structural growth story in the making. 
 
During the last few months, however, investors have built up vast expectations for the strong returns generated in the equities market in the past year. Right now, though, they should keep contain their expectations and invest in equities for the long haul as always. 
 
In the short run, there could be still some swings and dips because of short-term head-winds in the next 6-9 months as global markets begin to absorb the change in the west's monetary policy. 
 
But the possibility of improving growth rates in the economy in the next few years should weigh more greatly on an investor's mind as against a correction for now; and investors should take the opportunity to align investments more towards financial assets as much as possible in the coming months. 
 
Indian household savings have been very poorly invested in financial assets like equities and debt instruments, while they are heavily over-invested in physical assets such as gold and real estate. A mere 2.3 per cent of Indian household savings are allocated to equity. 
 
This is tragic. We are hopeful that this could change in the coming years more towards financial assets. If that happens, domestic investors will take the advantage of structural opportunities that the unfolding of the India growth story offers. 
 
For now, there are early signs that the domestic investor is returning to financial assets. Indian investors have been investing financial assets as we are seeing better inflows into mutual funds. Foreign flows have been encouraging with more than $13 billion entering the Indian equity markets this financial year, and a good chunk in the debt market, too. With policy executions and elimination of bottlenecks in several sectors, more foreign flows are likely to enter Indian markets in the next several years. 
 
So there's no doubt that investors should take the long term plunge. Those investors who are concerned about rising volatility in the next few months should take a more defensive approach of purchasing equity with a mix of debt assets that make allocations to equity based on valuation benchmarks such as price to book value, where schemes such as ICICI Prudential Dynamic Plan and ICICI Prudential Balanced come in. 
 
These funds take the current market valuations into consideration to make equity allocations, which has increased considerably for now. Hence, these funds have been increasing strategically into debt investments of late. 
 
Debt markets are also building up all that is required for an unwinding of a structural rally. Besides, as inflation and interest rates come in significantly lower in the next few years, investors can accumulate long-term debt schemes.
 
Again, consider the SIP route as this would enable you to accumulate financial assets regularly over the next few years. As both the debt and equity market is structurally poised to do well for the medium to long term, for now a steady accumulation at all levels is the right investment strategy.


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economy inflation stockmarket investment icici nimesh shah