How to make a ‘good investment'

How to make a ‘good investment'



What is a good investment? We can spend hours defining that but to me, a good investment protects the value of the investor's principal. But, then, if you just tuck money away in a mattress, the principal is protected. Is that a ‘good investment'? Not really. A good investment must also ensure that inflation does not make inroads into your portfolio. The threat of inflation, especially consumer inflation, is looming large across the globe. Food prices, in particular, have been rising from April 2009 and India is no exception. In this context, inflation is not about ‘price rise' but about a ‘state of rising prices'.

Arresting inflation

Expectations of such a state of rising prices emerging in the near future is getting stronger. In the Indian context, food price inflation (currently around 20 per cent ) is a matter of grave concern as food constitutes almost 45 per cent of the spending pattern of the common man. Oil, metals and other asset classes are firming up rapidly which will have a cascading effect on inflation in the days to come.

Therefore, with one-tenth of the country's GDP in fiscal deficit and the government in no hurry to roll back the fiscal stimulus, the RBI is left with few choices other than to signal a tighter monetary policy. If they don't do it now, they would need even harsher measures to arrest the inflation threat. The bond market has begun discounting the raising of rates by the RBI, and, irrespective of the degree of hawkish tone in the ensuing credit policy, yields will continue their upward journey. The roll-back of stimulus, (implying less government borrowings) if it happens, will be positive for the bond market from the demand-supply (of government securities) perspective.

Earnings growth

On the equity front, market undertones are expected to remain positive as long as foreign institutional investors flows continue. Beyond the results-season market volatility, a bigger concern is the foundation of expectations of earnings growth of the Nifty fifty stocks in FY-11 over FY-10. A 20 per cent earnings growth consensus of the Nifty fifty stocks in FY11, on the back of Reliance Industries and Tata Steel alone contributing to 40 per cent of such growth, appears to be quite vulnerable. The profitability of both stocks is sensitive to global factors and not exclusively dependent on domestic growth story. Almost 60 per cent of the earnings growth in FY11 of the Nifty stocks is expected to come from high global swings related to the metals and energy sector.

Indian markets will thus remain quite sensitive to global macro cues; let us not rely too much on exclusive domestic economic growth-driven Nifty movements in FY-11. However, the time is once again ripe for bottoms-up approach in selecting stocks.