Last week's inflation figures finally started showing reflecting the reality of crashing prices, Wholesale Price Index (WPI) based inflation fell to single digit levels of 8.98% after 21 weeks of double digit inflation. This should give RBI more confidence in signalling interest rate cuts. If we see a scenario of sustained fall in interest rates, it could result in an interesting play on Gilt Funds (Funds dealing with government securities).
Debt securities typically face 3 kinds of risks
- Credit Risk
- Liquidity Risk
- Interest Rate Risk
Since interest rates and price of debt securities have an inverse relationship (when interest rates move down, price of debt securities go up to bring the yield in line with the prevailing rates), there is potential for decent capital gains to be made on the Gilt Funds
Should be an interesting play for next 6-12 months. Holding beyond 12 months would also give indexation benefits to potential capitals gains resulting in higher tax efficiency
Monetary Action
This weekend RBI announced some measures that would bring some benefit to the financial and real estate sector.
Given the high budget deficit figures, do not expect big bang government investment projects to get us out of this funk. Also, with the upcoming general elections in the country, I do not expect big ticket projects to be announced due the restrictions generally imposed by the election commission before the elections to prevent voter bias.
However, even if the government does not have much play on the fiscal side (taxes, spending), it does have some leeway on the monetary side (control money supply). Expect lot of action from RBI for some more time to come.
Agriculture and Retail Chains
One area where I am pretty confident about growth prospects is Agriculture and allied sectors (Logistics and Transportation, Water Management).
It is a populist measure as well, so I see lot of investments earmarked for Agriculture going ahead.
This along with the development of retail chain is going to be a blessing for our food chain infrastructure (I am not delving here on the impact it would have on our mom-and-pop kirana stores and the cudgels politicians are likely to take against big box stores). Do you know that 72% of our vegetable and fruit produce goes waste due to lack of proper storage and transport facilities? Food grain loss % figures too would not be far behind
Retail chains would bring in lot of investment in hinterland to build warehouses/cold storage/transportation infrastructure to get the produce on the shelves. This should trigger a boom in the hinterlands, and more wealth should start trickling there resulting in more equitable growth. Yes, I know there are challenges around small farm holdings and restrictions on corporate farming, but I am hopeful.
Listed companies I am hoping would benefit among others are Mahindra & Mahindra, Jain Irrigation and ITC
Other interesting sector, this time globally, would be alternative energy sources. Fortune carried an article recently. I am considering deploying a small portion there.
Going ahead, which markets you think would be the first to recover?
Would it be US - which is being most aggressive in tackling the crisis, where most of the money has fled to, and would soon be looking to be deployed into meaningful investments?
Or would it be emerging markets like India, which do not face the same fundamental issues like US, but suffer from the credit crunch which is a global malaise?
Right now, my money is on the US. Let's see!
In passing, Tata House seems to be in a wee bit of trouble. They have huge loans to service from Tata Motors and Tata Steel. Tata Group has done lot of acquisitions recently when the credit was cheap (Corus Steel, Rover, Jaguar). Other group companies too have made acquisitions. Group companies have been hammered in a big way (but hey who has not been hammered). Companies like TCS, India Hotels, Tata Chemicals too are down. TCS was expected to the cash generator for the group.
Happy investing in these interesting times!
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