Range-bound equities

Range-bound equities
The Economic Times, February 10, 2009, Page 14

Investors Face Difficult Choices

MOST panellists at the ‘Equity Outlook- 2009’ discussion hosted by ET Now, ET’s upcoming business news channel, were of the view that the stock market would be range-bound, and 2009 would most likely end at 8,000-8,500 for the sensex. The only silver lining, if one can call it that, was the near consensus that India would be among the first to come out of the slump and that the stock market would look up much before the real economy turned a corner. There was, however, no consensus on when that turnaround could happen, though some expected the outlook to improve in early 2010 but warned things might get worse before they got better. Clearly, equity investors face difficult choices. Though, equities offer a promise of decent gains over a three-to-five-year horizon, in the short term, there are significant risks. There would be many 20-30% bear market rallies, one of which, hopefully, would eventually turn into a sustained stock market upturn. If an investor chooses to wait for a definite revival, she is sure to miss out on the initial part of the rally. On the other hand, if she invests in this volatile market, the returns could be flat or, in the worst-case scenario, suffer an erosion that could be as deep as 20% from the current levels.

One way out of this dilemma is to stay clear of equities for a while and instead invest in debt, bank deposits or mutual funds. Bank deposits still offer a decent 8% interest while debt funds can give much higher returns if interest rates decline further, which is a distinct possibility. With inflation likely to fall sharply in the near future, debt would in fact yield very high real returns, besides providing capital protection. The returns from debt investment would also make up partly for the initial rally investors may miss out on because of a cautious approach. Also, mid- and small-cap stocks tend to join the rally when the front-line companies and the large caps have already run up sharply. Indeed, some of the panellists did not see the small/mid cap stocks going anywhere for the next 3-4 years. Therefore, a prudent mix of large and small/mid cap stocks can deliver a good return even if the investor joins the rally when the blue chips have already travelled some distance.