Investment tips to prevent the falling GDP from affecting you

Recessions don’t last forever. Wait for the boom phase, and be careful not to recklessly weed out stocks from your portfolio while waiting.

Investment tips to prevent the falling GDP from affecting you

You must have heard the news by now: credit rating agency Moody’s has lowered India’s growth forecast for 2020 and 2021 by about a percentage point for each year – to 5.4% and 5.8%, respectively. But even these reduced projections are higher than the 4.5% growth seen in the third quarter of 2019-20. Moody’s attributes this to the recent PMI (Purchasing Managers’ Index) data, which signalled positive trends.

However, despite the encouraging PMI data – which reflected a slow turnaround since January – Moody’s felt that for the current recovery to match earlier growth rates, two things had to happen: (a) domestic demand – both rural and urban – had to pick up, and (b) and banks should be willing to lend.

Given this scenario, especially when a global rating agency seemed uncertain of an Indian economic turnaround, investors might wonder whether it makes any sense to invest in the capital markets. Before answering that, let us first look at what the PMI data indicated.

Positive trends

IHS Markit, which aggregates PMI data, found on surveying Indian companies that despite a ‘subdued start’ to the third quarter of 2019-20, manufacturers witnessed three significant trends in December and January: (a) rising sales; (b) increasing demand; and (c) significantly higher export orders (for over two years running).

In fact, the manufacturing PMI in January reached its highest level in eight years, while the sector showed the “steepest upturn in employment since August 2012”. The impact of all this was felt in the services sector, which too has begun showing growth. Pollyanna de Lima, a principal economist at IHS Markit, noted that “this is good news for jobseekers”.

More jobs naturally mean more money in circulation, more demand for goods and services, and bigger impetus for the economy; in short, signs from several quarters show that the Indian economy could be on the cusp of a rebound.

But what does all this spell for the investor?

Related: How India's economy has progressed through the years

To invest or not

Investing is a continuous process; if you want to reap benefits from investments in the stock market, you should stay invested for the long run – even during slowdowns and sliding GDP figures.

Recessions are usually cyclical, and it is not uncommon for an economy to slide once every decade; when that happens, capital markets are naturally depressed and stock prices are low. But look on the bright side: during a recession, you get good stocks cheaply. Just think of it as a stock-clearance sale at your favourite mall; only here, you get shares at a ‘discount’. 

If you lack extensive knowledge of stock markets, invest through mutual funds. If time is a constraint, there is always the SIP route.  

Just remember that equity is the best option during periods of recession. For example, people don’t stop using toothpaste or eating biscuits because times are hard. That does make scrips of FMCG companies attractive, though company fundamentals and the competition need to be weighed in too.

Related: 5 Industries that contribute the most to the GDP of India

Investment areas

So, to get down to brass tacks, how should retail investors go about saving their investments in the current period of economic slowdown? Let us explore a few areas:

  • FDs/liquid funds

If your risk appetite is low, or you are following a strict time schedule to achieve some financial goals in the immediate future – a few months to two years – you could look at a liquid fund or a bank fixed deposit (FD). These low-risk and stable instruments should meet your risk profile.

Liquid funds are debt mutual funds that invest primarily in short-term money market instruments such as treasury bills, government securities, commercial papers, and term deposits. The maturity period is lower and can be redeemed faster. 

How fast? Well, let us say you always wanted to holiday abroad but couldn’t afford one so far. In this case, you could put some of your investible money in a liquid fund for a couple of months and plan your overseas vacation this summer when school is out. 

You might also consider investing in a combination of liquid, debt, and FDs; other options can be short-term funds and flexible bank deposits for periods up to six months, and short-term mutual funds for slightly longer periods. What mutual funds do is keep your investments diversified.

Related: Why to keep money in a savings account when you can invest in these liquid mutual funds

  • P2P lending

If you are slightly more adventurous and find the returns from bank deposits too tepid, you can consider parking some of your surplus funds in a peer-to-peer (P2P) lending platform. Returns here will be considerably more.

Yes, there is a flip side – loans disbursed over P2P platforms are unsecured in nature, which places the money you are lending at risk. However, the lending platforms generally follow stringent underwriting and oversee all transactions between the borrower and the lender. The borrower’s credibility is assessed on the basis of their risk profile before your fund is disbursed.

  • Mid-caps

Several mid-cap stocks have seen sharp correction over the last two years, though prevailing conditions could make recovery in this space a tough proposition. At the same time, this is an accumulation phase for investors; there’s no need to give mid-cap stocks a pass, as a few mid-cap stocks are sector leaders.

What this means is that investors with a long-term horizon can consider investing small amounts in the mid-cap segment. However, this should be done systematically. One way could be to invest through SIP in a mid-cap mutual fund.

Also, be selective and consider all aspects. For instance, the Trump-Modi meet did not lift market sentiments as no key deals were signed; in fact, the broader BSE mid-cap index dropped 68 points at the close of the day’s trade on the day of the meet (February 25) while the small-cap index shed 65. Check how large-cap, mid-cap, and small-cap funds are categorised?

However, banking stocks (e.g. Federal Bank) and those of export-oriented pharma companies are doing well; we will discuss these later.

Related: How has India fared in terms of the economy since Independence?

To repeat a point, FMCG stocks are usually a good buy, and you might pick up a few such bargains in the mid-cap segment, such as Future Consumer and Emami. Look these up. Some like Future Retail has other attractions – this too will be discussed later. 

  • Retail stocks

Most retail companies in the organised sector have come of age and have well-oiled systems in place. This has helped the growth and made retail stocks an attractive alternative. But beware of excessive valuations.

Also, study company fundamentals. For example, Future Retail has a new strategy for growth that involves shutting down unprofitable stores and other cost-saving measures. In a move that could herald further collaboration, Future Retail has also sold a small stake to Amazon.

  • Banks

The banking sector is another sector worth looking at, especially those into corporate banking. There are three reasons for this: (a) they usually have low valuations; (b) their NPAs are dwindling; and (c) rising business opportunities. This is not to say that retail-facing banks such as HDFC and Kotak Mahindra are not doing well; in fact, they are likely to flourish despite volatility. 

Federal Bank is a good example. A mid-cap bank with improving fundamentals and reasonable valuations, its retail book has shown positive growth, mainly due to low-risk housing and gold loans.

  • The export sector

This segment straddles industries as diverse as IT and pharmaceuticals. However, punters see the segment as the best way to beat a domestic slowdown. Their argument is that export-oriented companies will benefit from the rupee depreciation triggered by the slowdown. 

Further, their main market, the US, is fairly stable now. In this connection, there’s one point to be made abut pharma companies; their exports to US has taken a hit in the recent past thanks to Trump’s policies, but those with a small domestic network, such as Cipla, will continue to do well. After all, people won’t stop taking medicines because of the slowdown.

At the same time, investors are once again advised to be selective and to be wary of highly valued stocks.

Final words

If we are to learn anything from history, it is this: slowdowns are usually immediately followed by the markets offering great returns. So, there is absolutely no reason to stop investing. In fact, you could use this lean time to create a great portfolio by revisiting your asset allocation. 

One warning though: when reviewing performance, it is easy to wrongly identify how a stock has fared. So, what may have been a reasonable performance can get summarily dismissed as bad because the investor is bent on ‘weeding out bad performers’. 

Be on guard against this. And wait for the boom phase, because recessions don’t last long. Did you know your savings can boost India’s growth; here’s how

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.




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