Sudip Bandyopadhyay’s Blog

International financial markets went through an unprecedented turmoil in 2008-09. All asset classes except gold suffered major reversals and investors lost huge amount of money.  While the world markets have recovered since then significantly, uncertainties in the developed markets still continue to cloud the horizon.  Domestic investors are not sure about deployment of their savings.  Risk aversion is still driving  decision making.

To put things in the perspective, it should be noted that even in 2007 when markets were booming around the world, India was growing at 7-8%, whereas the developed world was growing at 4-5%.  The differential in growth rate was 2-3%.  Currently India is growing at 8-9% whereas the developed world is either stagnant or growing at 1-2%.  Thus the growth rate differential is 6-7% as opposed to 2-3% in 2007 when Indian equity markets peaked.  This makes investment in Indian economy and equities a compelling proposition for international investors. There may be short term turmoils in the markets but over medium to long term Indian markets will attract huge amount of capital due to superior returns.

For the domestic investors, equity is the only asset class which can over a period of time beat inflation and produce good return.  Assuming GDP growth of 9% and inflation around 6%, the nominal  growth will be around 15%.  Thus on an average  the growth of Corporate India should be around 15% ensuring  similar return for equity investors over the next 3-5 years.  Of course, right sectors and stocks should be selected with focus on domestic consumption and Indian growth story.

Other asset classes like debt, gold, commodity etc. may not provide sufficiently attractive returns in the near future.  Interest rates every where around the world have bottomed out and is currently on its way up.  Thus, investors in bonds  / other debt instruments at this point of time may get adversely impacted.  In any case net of tax return on such instruments is not comparable with tax free long term gains from equities.  Gold after having appreciated significantly during the last couple of years, has limited scope for further appreciation.Planned slow down of China to prevent over heating of their economy has resulted in reduction in demand for metal and commodities.  This has led to significant pressure on commodity prices leading to limited scope for profitable investment in commodities.

In view of the above, calibrated deployment of savings in domestic equity in a phased manner for medium to long term will yield optimum results for Indian Investors.