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Q1 GDP at 5.5% may push rate cut expectations farther

Posted by PersonalFN



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The Gross Domestic Product (GDP) for the first quarter (Q1) of FY 2012-13 (FY 13) stood at 5.5% a tad above the GDP growth of Q4 FY 2011-12 (5.3%). However, the GDP growth of Q1 FY13 was far more muted as compared to Q1 FY12 GDP growth of 8.0% (a year-on-year performance). The consumer sentiment in the country too was subdued as being reflected in just 4% growth in the trade, hotels, transport & communications sector as against 13.8% growth for the same period last year. On the other hand services sector growth (including insurance and real estate) stood at 10.8% for Q1 FY13 as against 9.4% for Q1 FY12.

(Source: CSO, PersonalFN Research)

The uptick in the Q1 GDP growth over the previous quarter can be attributed to:

  • Manufacturing growth: The manufacturing sector managed to stay in the positive terrain by posting a growth of 0.2% as against -0.3% in the previous quarter. But when compared to Q1 FY12 (wherein the growth in this sector was 7.3%) the growth was far more muted. Going forward with the expectations of reform measures to be adopted by the Government and easing of interest rates, the manufacturing sector may witness a turnaround.

  • Agriculture, forestry & fishing: The agriculture, forestry & fishing sector too contributed to the uptick in the GDP growth by growing 2.9% as against 1.7% in the previous quarter. Also, with the monsoon season picking up in the second half, the agriculture sector may generate better growth in the near future.

  • Mining and quarrying: The mining and quarrying industry on the other hand just managed to remain in the positive terrain by posting a growth of meager 0.1% as against 4.3% in the previous quarter. The faith of this sector seems to be in the dark due to the recent eruption of the coal mining scam. Going forward, delay in awarding blocks for mining, bureaucracy, etc. may cripple this sector from generating positive growth.

  • Construction: The construction industry bounced back with a robust growth of 10.9% as against 4.8% in the previous quarter. Gradual ease in the interest rate going forward may help the construction sector to post a strong growth as low interest rates will reduce the cost of borrowing for the companies.

We are of the view that, the uptick in the GDP growth needs to improve going further to get the economy back on its growth path. At this juncture, the slowdown in inflation and a better than expected GDP growth may preclude the RBI from going ahead with a rate cut. The RBI at its upcoming second quarter mid-review of monetary policy scheduled on September 17, 2012 may maintain its status quo on interest rates.

The improvement in the GDP growth going forward depends a lot on the Government’s stance on important reform measures like FDI in multi-brand retail, storage facility for excess agriculture production, regulating the real estate sector, robust infrastructure, etc.

What should equity investors do?

Investors in equity should continue with their staggered approach towards investments. Yes, in the near term the news disseminating from the developed economies - especially Euro zone and the U.S. may show a rippling and crippling effect on the Indian economy and its equity markets. But we believe that one needs to show patience and perseverance in such times and stay invested for the long-term, and also invest further as soon as valuations look attractive.

As far as investing in equity mutual funds is concerned one needs to stay away from U.S. or Euro oriented offshore funds in a scenario of low growth and high unemployment in the developed countries. While investing in equity mutual funds we recommend that you opt for value styled funds and adopt the SIP (Systematic Investment Plan) mode of investing as this will help you to manage the volatility of the equity markets well (through rupee-cost averaging) and also provide your investments with the power of compounding.

Remember, while investing, select only those equity mutual funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.

What should debt investors do?

Well, we think that the current situation is still attractive to take exposure to debt mutual fund instruments as interest rates are likely to ease albeit gradually.

Hence at present while taking exposure to debt mutual funds and fixed income instruments, one should clearly know their investment time horizon. Investors with an extreme short-term time horizon (of less than 3 months) would be better-off investing in liquid funds for the next 1 month or liquid plus funds for next 3 to 6 months horizon. However, investors with a short to medium term investment horizon (of 1 to 2 years) may allocate a part of their investments to short-term income funds which should be held strictly with at least 1 year time horizon.

The present scenario also seems comfortable to look at longer horizon debt mutual funds. Thus, if you have a longer time horizon, then you can now hold some exposure to pure income funds. Since longer tenor papers will become attractive, longer duration funds (preferably through dynamic bond / flexi-debt funds) can be considered, if one has an investment horizon of say 2 to 3 years. However, one may witness some volatility in the near term as there is always an interest rate risk associated with longer maturity instruments.

Fixed Maturity Plans (FMPs) of upto 1 year may for some more time yield appealing returns and can also be considered as an option to bank FDs only if you are willing to hold it till maturity. You can consider investing your money in Fixed Deposits (FDs) as well, before the interest rates offered on them are reduced. At present 1 year FDs are offering interest in the range of 7.25% - 9.00% p.a.

What should investors in gold do?

Even at the present price range, gold still can be considered as your hedge against the inflation bug. Though there will be some sideways movements due to any temporary relief in the paining Euro nations, we believe that there could be volatility in the equity markets if the paining Euro nations like Greece, Italy and Spain do not come with some concrete solutions to get their finances in place. Also, with the Government battling to meet the fiscal deficit target amid a gloomy global economic scenario and a slowdown in economic growth, we think that investors would prefer to take refuge under the precious yellow metal despite elevated prices. And with the festive season round the corner, the demand for the precious yellow metal may further rise despite elevated prices.

Hence, nothing has changed for gold and we believe it will continue to maintain its upward trend in the long-term along with some sideways movement too.

Therefore, we recommend that you should have a minimum of 5%-10% allocation to gold. Invest in gold with a long term perspective with a time horizon of 10 to 20 years.

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