Time to Recalibrate your Investment Expectations

Published On: 15-Dec-2017

As we enter the month of December we become just that bit more aware of ticking of time. The change of year beckons. It is customary to reminisce over the events of the year gone by. But remember that while value compounds over time; the actual passing of a year or a quarter matters very little if at all in the markets. This has been a good year for equity investors around the globe. The MSCI* All Country World Index is at a lifetime high. Out of the 47 countries in the ACWI Index 16 have registered lifetime highs this year and another 13 markets are trading within 5% of their record highs. This has been a good year for the global economy-maybe the best in a decade. The International Monetary Fund (IMF) in its October 17 report has raised its forecast for global growth to 3.6% this year and 3.7% next year, acceleration from the 3.2% growth recorded in 2016. These growth rates are better than the norm for the post Global Financial crisis period and have finally climbed back to the long term average of the past 30 years. This year is also likely to buck the trend of the past decade, in which economic forecasters repeatedly started the year optimistic about growth prospects but then continually marked them down. All 45 countries tracked by the Organization for Economic Cooperation and Development are on track to grow this year, and 33 of them are poised to accelerate from a year ago, according to the OECD. It is the first time since 2007 that all are growing and the most countries in acceleration since 2010, when many nations enjoyed a fleeting snapback from the global financial crisis. It has helped that liquidity, created by an increase in central bank balance sheets, has continued to expand. The US Fed has announced a plan to reduce & normalize the size of its balance sheet commencing in October 2017. This is being executed in a very deliberate and gradual fashion - $10bn a month during the period  in Oct-Dec 2017. This amount will be increased by $10 billion every three months. In all it will take a few years for the normalization to be complete. (https://www.newyorkfed.org/markets/opolicy/operating_policy_170920) And even rate normalization is following a very cautious path.


                                                                                                            source:OECD 2017

India’s recent Gross Domestic Product (GDP) growth prints do not reflect this buoyancy in global growth as we have been dealing with transient challenges – first from demonetization and then from the implementation of Goods & Services Tax (GST).The GDP print of 6.3% for the second quarter of FY18 however marks an improvement from the 5.7% in the first quarter of the year and ends a 5 quarter slowdown. India’s overall macro-economic indicators display healthy readings though there is a bit of pressure on the fiscal side, partly from unclear trends on GST collections. The longer term benefits from demonetization and GST implementation will raise India’s potential for growth as the transient challenges from these changes fade. There is little doubt that India’s potential for growth is much higher than what we have recorded in recent quarters. The continued thrust on policy reforms and reducing friction for businesses is key to unlocking the potential. That potential is reflected the forecasts for the years ahead Of particular relevance to all investors is the new inflation targeting policy of the RBI supported by the government. The Consumer price Inflation (CPI) target has been set at 4% plus or minus 2%. In fact the Monetary Policy Committee (MPC) has explicitly stated that it ‘remains committed to keeping headline inflation close to 4 per cent on a durable basis’. This is a new paradigm for India. Now with the inflation target being set much lower the nominal growth rates, the benchmark interest rates and the equity risk premium should accordingly get set lower. During the decade of FY2005-2014 India’s growth averaged 14.9% in nominal terms and 7.5% in real terms. As per the new series which is available from FY2013 India’s growth has averaged 11.7% in nominal terms and 6.9% in real terms. In the first half of this year nominal growth was at 9.3% and real growth was at 6%. It is as yet early days but we could we be entering an era of lower nominal returns but potentially better real returns. Investors may have to reset their nominal return expectations but positive real returns will likely prove to be magnet; driving a larger proportion of savings into financial assets and less into assets like gold and real estate. In any case the government’s thrust on financial inclusion and crackdown on black money and benami holdings will further this outcome.

                                                                                   source for charts :MOSL

This is a further strengthening of the structural foundation of the economy. But investors should note that financial assets can be volatile and the very fact they are marked to market every day causes investors to behave very differently. If there is one unusual pattern to market behavior in India and globally it has been a sharp drop in volatility in recent times. The key to navigating volatility is have a well thought out asset allocation plan which focuses on optimization based on financial goals rather than one based on maximization. This combined with a longer term perspective should enable investors to ride our any challenges posed by an increase in volatility. We will be writing frequently on this blog in the days ahead and hopefully we will be able to cover issues that are of relevance to investors. So we roll to the end of 2017 it is timely to recollect what a wise man once said- there are no endings only new beginnings

*MSCI Morgan Stanley Capital International. Disclaimer

Author Bio

Vetri Subramaniam
Vetri Subramaniam is the Chief Investment Officer of our Company. He holds a B.Com degree from University of Madras and a Post Graduate Diploma in Management from Indian Institute of Management, Bangalore. He joined our Company with effect from January 23, 2017. Prior to joining our Company, he was associated with Invesco Asset Management Private Limited, Motilal Oswal Securities Limited, Kotak Mahindra Asset Management Company Limited, SSKI Investor Service Private Limited and Kotak Mahindra Finance Limited.