Most Indian business leaders are displaying great confidence in the new year. Although balance sheets and margins are under pressure, entrepreneurs believe the worst has passed and earnings growth will rebound. Growth is expected partly from a resurgence in consumer confidence, which in turn, will be driven by lower interest rates.
Another expectation is positive policy action. There have been some signs of a change in attitude in the past three months, after UPA II sat on its hands for three years. Government finances are in a mess with deficits at record levels. Elections are drawing closer.
So, the argument runs, the UPA-II will do what it can in the next few months. History is against this. Election years rarely see rational policy. But the macro situation is so bad the government may be forced to take rational decisions to avoid sovereign downgrades. In turn, policy action could mean more investments, including FDI in infrastructure.
Globally, most regions will experience slow growth. The US has only temporarily avoided falling off the fiscal cliff. Europe is insecure on the currency front with large economies like Spain and Italy struggling. Japan is in recession. China is in a slowdown. But the doom and gloom could mean that FIIs continue to invest in India as a best-growth-option.
These expectations could be wrong. But let's assume the consensus is right. What should you do with your 2013 portfolio? Will you continue to invest in the same assets in the same proportion? Should you focus more on blue chips, or on small caps and midcaps? Should you increase debt exposure? Should you hedge with gold, or buy real estate?
If the expectations are right, relatively depressed sectors and relatively smaller stocks will give better returns than benchmark indices. This means sectors like Energy, IT, Metals and Capital Goods could throw up the biggest winners. Infrastructure, as mentioned above, is due for a rebound and there are the usual hopes of disinvestments in PSUs.
Apart from PSU disinvestment, equity investors must reckon with enforced primary market activity. There may be a spate of issues in closely-held companies to meet the SEBI deadline for lowering promoter stakes. Banks start a five-year programme of equity and debt offerings in order to meet Basel III norms.
Whether you invest in IPOs or not, you will have to cope with the price-volatility induced by such offers, and judge the fundamental implications of equity dilutions on case-by-case basis. These are listed concerns with long management histories. So it's easier to make valuations.
The debt exposure scenario is relatively simple. The RBI may disappoint the market by not cutting rates as much as entrepreneurs hope. But it is unlikely to raise rates. This makes it a good time to bet on medium-term and long-term debt funds, rather than fixed deposits. If rates don't rise, you lose nothing. If rates fall, you benefit from capital gains.
Gold peaked in mid-2011 (at about $1,900/oz) and has since dropped, closing at $1,675 last week. If the global economy turns around, gold could easily drop below $1200. It is a hedge. It will go up again if global growth stalls. But it is not, at the moment, a safe hedge. You could hope for a potential $200 payoff versus a possible $500 loss. So, if you buy gold, be prepared to sell it too, either to book profits or limit losses. Silver may be a better hedge. It retains value in recessions like gold. It has a much larger industrial profile and could also gain, if industrial activity rebounds.
Real estate is a messy, localised market. Shareprices of listed realtors have rebounded, although balance sheets indicate that they are cash-strapped. Land prices by and large, are depressed and there's inventory yet to be sold.
But real estate has a strong correlation with the stock market and it is rate-sensitive. If stocks deliver a second straight year of gains, along with retail and domestic institutional (DII) participation, real estate will also climb. Also if you take a floating rate mortgage at the top of the rate cycle, you could be a major beneficiary as rates fall.
Last year, the FIIs were the only bulls. Retail and DIIs have a habit of coming late to the party and they could turn bullish now. That would have a positive effect on the smaller shares the FIIs cannot be bothered to track. But if the FIIs change attitude, the market will fall for sure. If you are looking for short-term capital appreciation in 2013, watch FIIs like a hawk.