Equities are overhyped and may offer better buying opportunities later. So, here’s a case for offbeat options, such as Chinese stocks, gold and gilt funds.

If it’s the first week of January, it’s likely that you are quite tired of forecasts. You’ve heard all about how 2014 will be a dream year for equities, with economic recovery taking root, interest rates falling and a new reformist government installed at the Centre. But as we step into the New Year, we don’t agree with this chorus and have just one prediction to make — 2014 will be a very bad year for forecasts.

With many speed bumps ahead — mid-year polls, the direction of interest rates, the decision on Fed taper and the impact of a US recovery on foreign institutional investors (FII) allocations — there’s going to be far more uncertainty for investors this year than in 2013. Therefore, there isn’t any compelling reason to make wholesale shifts in your portfolio just because it’s the first week of January. We take stock of the key asset classes — conventional and offbeat — that may offer money-making opportunities this year.

Be unconventional

Stocks have proved remarkably immune in 2013 to a range of risks, but that doesn’t make for an equally sanguine outlook for 2014. For one, after a 35 per cent gain over the last two years, stock markets aren’t particularly cheap at 16 times forward earnings. And this mini-bull market has had precious little support from fundamentals.

While the Sensex itself has cheerily climbed, profits of Sensex companies have seen growth rates wind down — from 21 per cent in 2010-11 to 10 per cent in 2011-12 to an actual decline in the last two years. Until corporate profits return to double-digit growth, the case for stock prices to head higher will remain weak.

Two, it is by no means certain that FIIs, who hold the key to Indian stock prices, will continue their love affair with the local markets this year. The US economy is on the mend and US yields are rising; so the temptation to invest incremental money back home will be strong. Indian elections looming at mid-year may also prompt FIIs to play a waiting game.

With the markets already primed for a best-case scenario (a new reformist BJP government emerging with an absolute majority), the potential for disappointment is far higher than that for a surprise. This suggests that making a big bet on equities now can be injurious to your wealth. Best wait for better buying opportunities mid-year.

Three, with optimism about the economy powering up cyclical stocks since August and defensives still expensive, good bargains are hard to find in today’s market. 2014 may be a good year neither for bargain hunting value stocks nor for paying top dollar for defensive ones. It may be best to look for companies that serve up some profit growth at a reasonable price.

Amid the uncertainty, there are a couple of offbeat options you could consider now. Listed public sector companies is one space that holds promise. With the CNX PSE index today trading at just 8 times (FY14 earnings), a huge discount to the market, profit expectations from PSUs are modest. Yet, the space features quality companies with good governance and low debt. You can either buy non-bank PSUs directly or play this opportunity through mutual funds which focus more on non-bank PSU stocks, such as the Religare PSU Opportunities Fund and Baroda Pioneer PSU Fund.

With clouds of uncertainty menacing Indian markets, why not invest a little money in our closest neighbour — China? After a 2 per cent decline last year, Chinese stocks (represented by the Hang Seng Index) are among the cheapest in the world. The index trades at barely 10 times FY14 earnings compared with the Sensex’s lofty 16 times.

The Chinese economy is predicted to grow at 7.5 per cent this year, while India may struggle at 5 per cent. Also, unlike India, which is braced for political risk, China has already seen a change in leadership in end 2013, with the new President announcing a set of pro-market reforms. This may make foreign investors comfortable enough to allocate more to dragon land. The yuan is the most placid currency in the world, another big plus for overseas investors buying Chinese stocks.

Use the feeder fund route to bet on China via the Goldman Sachs Hang Seng Bees, JP Morgan Greater China Fund or Mirae China Advanatge Fund.

Go for gold

If you’re planning to buy gold for your child’s wedding or are eyeing a fancy piece of jewellery, don’t hesitate. This is the time to buy it. After a 28 per cent fall in dollar terms (18 per cent fall in rupee terms) in 2013, global gold prices are at three-year lows. Prices are unlikely to have much more downside from here.

It was investment demand from exchange-traded funds (ETFs) and central bank buying that drove gold prices ever higher over the last five years. But with global economies looking up and stocks bouncing back, investors have been quick to desert this safe haven. Most global forecasters are now making gloomy forecasts for gold in 2014, citing US taper, tamed inflation and vanishing investment demand.

But Indian investors looking for portfolio insurance still have reason to go for the yellow metal at prices of about $1,200/ounce (domestic prices of about Rs 2,700/10 gm). For one, if taper fears are factored into stock markets, why not in gold? With ETF holdings plummeting 25 per cent, futures volumes in gold unwinding and central banks reducing purchases by a third last year, the speculative fizz seems to have already gone out of the metal.

Two, the metal’s demand-supply equation appears tight. Prices of below $1,200 an ounce are sure to curtail gold supplies as many global miners find it unviable to operate. Jewellery buyers in India and China (especially if the former’s import curbs are relaxed a little) are likely to stock up too, at lower prices.

Gold ETFs offer one of the few avenues for Indian investors to hedge against a weak rupee and a bear market in stocks. The best time to buy a hedge is when no one is clamouring for it. Investors should thus, consider putting just 5 per cent of their portfolio in gold ETFs. But with gold ETFs moving into a premium over NAV, be stingy and go in for those that trade at prices closest to their NAVs.

Cosy up to bonds

While both equities and gold may offer better buying opportunities mid-year, one asset class that is safe to buy now is debt. Benchmark interest rates, captured by 10-year Government bonds, are hovering just short of the 9 per cent mark. They may yet head a little higher, if the RBI decides to play hawk in the early part of 2014. But who wants to time bond market investments to a nicety? It is as difficult as second guessing the Sensex.

For conservative investors, tax-free bonds from top-rated public sector firms, offering 8.5-9 per cent, spell a great deal. These kind of returns on perfectly safe instruments come about once in a blue moon and investors should lock promptly into them.

More hardy debt investors, who can wait out volatile bouts in bond markets, can allocate a little money to long-term bond and gilt funds. We are certainly closer to the top of the interest rate cycle than the bottom. If food prices fall, as they are expected to and interest rates correct, funds that hold long-dated gilts will gain both from the high coupons on their holdings and from capital gains in the market. If you can hold your breath for two-three years, take the plunge.


(This article was published on January 4, 2014)
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