Which asset class has performed the best over last one year?

                                                                      Is the time ripe to move to equities?

The last twelve months have been exceptional for the Indian stock markets. Not only have the benchmark indices scaled life highs, the broader market comprising mid and small caps has done very well for itself. As today's chart clearly shows, equities have been the place to be over the last one year. Returns from all other asset classes look quite puny compared to the returns from stocks over the last year. Even Gold seems to have lost its luster.

Does this mean that investors should jump on to the bandwagon and enter the markets now? We believe that it would be a very poor decision to abandon the principles of asset allocation and jump headlong into equities based on one year returns. Investment in equities should always be made for the long term, in companies with sound fundamentals. Also, one must always keep the valuations in mind before investing in stocks. We also believe that investors should hold about 5-10% of their assets in Gold at all times. The yellow metal is an effective portfolio diversifier and provides a good long-term hedge against inflation. 

Rigid labour laws have hampered India's growth

A leading daily has pointed out about India's agriculture share in GDP, which has declined from 40% in 1973-74 to 14% now. The service sector takes the large chunk in the pie now. But this paradigm shift does not seem to have helped in creating enough employment. Despite India moving away from agriculturally-oriented economy towards the service sector; agriculture still employs large chunk of population. Besides, inflexible labour laws, poor infrastructure and ample red tapism have pushed a lot of our workforce in the unorganized sector.

Clearly, the government has not made far-reaching efforts to bring about the change in this direction. The government needs to bring in massive reforms in labour lawstake measures to make the climate more conducive for capital investments by pushing through reforms and implementing them. This may seem like a considerable challenge however, it is left with no option but to take a tough stance in the longer term health and interest of the Indian economy
. It also needs to take a relook at its various policies. This in turn will push labour from the unorganized sector to organized ones. It is well acknowledged that ramp up in capital spending and infrastructure goes a long way in taking a country's growth to the next level. Thus ramp up in capital spending and infrastructure can help to address this issue. On a much macro level, to raise India's growth trajectory, a broader reform agenda is needed. Thus the government will have to

Service sector dominates list of top Indian brands

A strong brand is a powerful tool for any business as it attracts consumers; allowing it to place and price products and services differently. If a company is able to leverage on this aspect, then it would have a positive impact on its overall business valuation. As aptly put by Warren Buffett in one of his letters - "Businesses logically worth far more than net tangible assets when they can be expected to earn on such assets considerably more than market rates of return. The capitalized value of this excess return is economic Goodwill. "

Today's chart of the day shows some of biggest brands in the country. This list is released by BrandZ, a WPP property. HDFC Bank, Bharti Airtel and State Bank of India lead the list of the top brands in the country. What is also interesting is that - as per the survey - seven of the top ten brands and 30% of the top 50 brands in the country came from the services sector. Another interesting point is that only 7 of the top 50 brands belong to PSUs

The top 5 corporate brands in India

The upside and risks from oil sector reforms

Oil and gas sector that was stifled with regulations is now witnessing some hope. The much awaited diesel deregulation was introduced in a phased manner some time back. And the way crude prices are behaving now, it might not be too long when diesel prices become fully market determined. That might seem a compelling argument in favour of investing in state run oil companies. Infact, some of the well known brokerage reports believe that the upside in such stocks is as high as 100%.

However, there are some caveats that investors must keep in mind before getting carried away. The first is that a full deregulation will depend on whether crude prices can stay at low levels, something no one can bet on. And even if that happens, it will be no guarantee that diesel will be sold at market prices. It would be worth mentioning here that even after full deregulation; oil companies continued to sell petrol below the market prices and did not have complete freedom in pricing. And that was not even compensated later, being officially deregulated. Lastly, there is a threat of huge competition from private players. A lack of level playing field has kept them at bay so far. But once they become active in already overcrowded refining space, even price wars cannot be ruled out. In short, while upside due to the expected reforms are already getting reflected in valuations of oil companies, investors must be aware of potential pitfalls while making investing decisions in the oil and gas space. 

How Dr Raghuram Rajan is 'bullet-proofing' India

It will be an understatement to say the RBI has been blessed with governors who are men with foresight. Governors ranging from Dr Y.V Reddy to Dr Subbarao have shown poise in the manner in which they maneuvered Indian financial markets through the toughest of global financial crisis. It seems Dr Rajan is no different. He has been the most vocal central banker to criticize the selfish monetary policies of the West in recent times. Having predicted the 2008 crisis in the US, this time around he had predicted global crisis of bigger proportion. However, instead of leaving the fotune of the Indian economy and its currency at the mercy of the US policy makers, Dr Rajan is taking tangible safety measures. As oil prices relented over the past few months, Dr Rajan has been building India's forex reserves. A measure that will ensure even if the US Fed rocks global economy with its policies, India will remain resilient to a great extent.

Below chart shows how the RBI is literally bullet proofing the currency by building Forex reserves.

 

                                           RBI buys up Dollars to re-build Forex Reserves

Indian house holds: Minimal exposure to equities

The past few months have seen domestic investors express interest in the Indian markets. That explains why domestic money is finding its way into mutual funds which appear to have pumped in thrice as much as FIIs in the past one month. However, if you look at the trend over the last five years, retail participation in equities has been abysmally low. Indeed, as can be seen from today's chart of the day, equities accounted for just 8% of the total financial savings of Indian households. The favourite continued to be bank deposits which formed a massive 48% of the pie. This is despite the fact that an 8 to 9% return from FDs is hardly anything considering the high inflationary environment in the country 

                                          P&PF- Provident fund and Pension fund, NBD - Non banking deposits, Ins- Insurance

The reasons why participation in equities has remained low is largely a matter of perception. Many retail investors have burnt their fingers during the 2008-2009 meltdown and many consider investing in equities akin to gambling. But nothing could be further from the truth.Equity investing is all about following a disciplined approach. It means buying when prices are low and selling when they are high. The period post the 2008 crisis was the perfect time for retail investors to get into the market. But many had done so during the peak in early 2008 before the bubble burst and suffered losses. Now stock markets have once again begun to rise and this has seen more and more investors getting invested. But the point is that retail investors will need to remain selective about the kind of stocks they want to invest in and not rely solely on tips provided by brokers and friends.