The most significant paradigm shift in 2012 is going to be a move from inflation worries to a focus on sustaining growth. Global uncertainties, which overwhelmed India in the past year, will continue to present challenges, but the important issues will be more indigenous than global. The first half of 2012 is expected to be marked by lower inflation because of a very good monsoon, the RBI’s tightening of interest rates throughout 2011 and a slowing economy. We will have to meet challenges on growth because the norm of 8% growth is not a given any more.Growth can come only from an increased focus on infrastructure development and reduction of the fiscal deficit. Consequently, the RBI will be inclined towards a more pro-growth stance, which will be extremely encouraging for the economy.
In line with this, the stock market is also expected to be more concerned about growth triggers and less about inflation. From the valuation perspective, small and mid caps are attractively valued. This segment represents an opportunity for investment and can potentially provide superior long-term risk-adjusted returns to investors.
Today, the biggest challenge is the infrastructure bottleneck, the easing of which is becoming increasingly imperative for the sustenance of growth. Funds for this can come from revenue received through effective taxation, disinvestment and a lower fiscal deficit. Companies, particularly cash-rich ones of top business houses, also need to start investing.
Indian investors have been under-invested in equities in 2011, which have a very low share in their asset pie. This is at a time when valuations are attractive and the prevalent scenario of moderating inflation and expected shift in focus towards growth presents a favourable environment for long-term investment in equity. A market characterised by low valuations and high investor fear is normally a good condition for long-term out-performance. Therefore, our advice to investors is to maintain their equity asset allocation and aggressively increase weightage on equity, after triggers like a further correction in valuations, crude prices correcting and an improvement in the fiscal deficit.
This apart, 2012 will also continue to have volatility as the primary theme. Rather than being wary of this, investors should invest in products that benefit from volatility. At the onset of the New Year, while challenges abound, positive cues continue to provide optimism. Moderating inflation, a downward interest rate bias, a focus on growth and eventual recovery in some areas of infrastructure construction could provide some tailwind to the economy and to the market in the second half of 2012. Historically, India has tended to reform systematically in periods of crisis. Therefore, the Indian economy is clearly positioned for the next wave of growth, if we can leverage our positives and demonstrate some sense of urgency to reform.
Nimesh Shah is managing director of ICICI Prudential Asset Management Company