FSM in Media:US Debt Crisis: Should it be a concern for Indian Investors?
US Debt Crisis: Should it be a concern for Indian Investors?Author: Dr. Renu Pothen, Research Manager, Fundsupermart.com IndiaThis article was published in Moneycontrol.com on Tuesday, 16 August 2011The year 2011 started on a good note for markets globally; however the trend could not besustained for long due to the recurring uncertainties that has enveloped the globalenvironment. The markets were subject to negative events around the world - firstly, thenatural disasters in Australia and Japan, political tensions in the Middle East, monetarytightening measures undertaken by Central Banks in the emerging economies to tame inflationand the worries over US recovery and Euro zone debt crisis. The final blow to these depressingsentiments came in the form of downgrading of US long-term sovereign credit rating from AAAto AA+ by Standard’s and Poor’s (S&P) ratings agency on 5 August 2011.This has led to anadverse reaction among the market participants as all the major global indices ended in red on8 August 2011, when the markets opened after the weekend. This bloodbath on the streetalong with the correction that followed in the next couple of days, created a panic among retailinvestors. Consequently, investors who joined the herd started selling their existing portfolioswithout even giving a second thought to the benefits of staying invested for the long term. Asfar as the view on the downgrade is concerned, we are of the opinion that this was done as therating agency believed that the measures taken by US to control its deficit was insufficient. Wecontinue to believe that the dollar will remain as the world’s reserve currency atleast in thenear term. Furthermore, this downgrade will not have any direct impact on the overall growthtrajectory and a default by the US government on its debt obligations is a not likely to happen.How should investors play in volatile markets?First of all, Indian investors should keep in mind that the Indian economy is basically dependenton domestic consumption and is not export-led unlike other emerging economies. However thisdoes not make us completely decoupled from the rest of the world, but the impact of thenegative global events will definitely be much lesser on India as compared to other Asianmarkets. As far as India’s macro environment goes, we believe that RBI’s continuous increase inrates since March 2010 have definitely had an adverse impact on corporate profits and inturngrowth. However, since commodity prices are on a downward spiral, we are expectinginflationary tendencies to cool down as a result of which RBI may put a stop to further hikes ininterest rates. The fact that India is currently undervalued along with the positive long-termgrowth story makes a strong case for investing into equities for all those investors who areready to take little bit of short-term volatility. Hence, instead of selling investments which were
made with a view to achieve long-term goals, investors should continue to hold onto theirexisting investments. In addition to this, investors should also start taking exposures in themarket either through the SIP route or lumpsum and in this way, take advantage of every dipthat the market provides.The corrections happening in the global markets can also be used as an opportunity by Indianinvestors to enter the same through the global funds launched by the mutual fund houses.Global funds are those funds that invest directly into the equities of a group of countries/asingle country or into a parent fund which works on a particular theme like gold/agriculture,real assets etc. Currently there are ~30 global funds in the market and offer documents for 16more funds focusing on different themes and countries like Latin America, USA, Indonesia, etchave been filed with SEBI.Although the sentiments on the global front continue to remainnegative yet we are of the view that the attractive valuations for most of these markets can beused as an opportunity to enter the same. Indian investors are generally in favour of holding aportfolio consisting only of domestic funds; however we believe that an exposure of 5%-10%into global funds will help in geographical diversification along with minimizing concentrationrisk. Investors when taking a call on these funds should keep in mind the taxation element (Ifmore than 65% of the allocation in the portfolio is towards international markets, then thetaxation mode will be similar to debt funds) and also the currency and geo-political risks thatgoes along with these funds. Powered by Launched in 2000, Fundsupermart.com is one of the largest online distributors of mutual funds in South East Asia, with regional presence in Singapore, Hong Kong, Malaysia, and now, India. www.fundsupermart.co.in is the online mutual fund information and transaction site for self-directed investors and is part of iFAST Financial India Private Limited. It is a single point destination for investing in Mutual Funds with Free account opening, Easy transacting, Zero transaction and maintenance fees, Research articles, Recommended Funds & Portfolios, Fund Manager Interviews, FSM School carrying basic articles/videos for novice investors and more! iFAST Financial India Private Limited is an AMFI registered mutual fund distributor (ARN – 67218). Visit www.ifastcorp.com to know more about the parent company. DISCLAIMER iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from
time to time add or dispose of, or be materially interested in any such. This article is not to be construed as anoffer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision shouldbe taken without first viewing a mutual funds offer document/scheme additional information/schemeinformation document. Any advice herein is made on a general basis and does not take into account thespecific investment objectives of the specific person or group of persons. Investors should seek forprofessional investment, tax, and legal advice before making an investment or any other decision. Pastperformance and any forecast is not necessarily indicative of the future or likely performance of the mutualfund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed hereinare subject to change without notice.