Which Are the Sectors to Bet on in 2018?
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In 2018, investors should actively opt for asset allocation through portfolios instead of betting on individual asset classes. With a portfolio approach, risk of loss is minimised while enjoying stability of returns. So which are the safe sectors to bet on in 2018?
We believe that 2018 would be an interesting year on many counts. Gross Domestic Product (GDP) growth will accelerate as the effects of idiosyncratic factors fade. Equity markets always move ahead of earnings, and we are convinced that India is at the beginning of a new earnings cycle. We hold a constructive view on the macro outlook. While Goods Service Tax (GST) has impacted production, increasingly we will find that the impact will be short-lived as compliance levels rise. The manufacturing Purchasing Managers' Index (PMI) has already bounced back and the underlying demand in the economy has remained strong even during doldrums. Discretionary consumption such as auto and two-wheeler sales has shown improvement, underlining our optimism about high frequency growth indicators. Given this backdrop, we expect Indian economy to grow by 7.4-7.8 per cent in 2018. The key downside risks are the impact of weaker monsoon on agricultural output, pace of bad loan resolution and global trade conditions. Any sign of acceleration in pace of reforms will be cheered by equity markets. If the investment cycle picks up, fiscal deficit remains manageable, and ongoing shift in household saving mix towards financial assets happens unhindered, expect the equities to deliver 10-15 per cent at benchmark level.
With our inclination towards equities amply clear, it is not without reason that we believe that fixed income should have a small allocation of your portfolio in 2018. In the last 10 years, every time equities have given more than 30 per cent return in a year, debt has under-performed. While debt gives risk-free returns, such gains drop when equities perform. This is where asset allocation holds a key to successful 2018. If you are between 20-40 years old, equities should have maximum allocation while debt should get only moderate place in your overall portfolio. We have already seen how returns on bank deposits and small-saving schemes have dropped. While the pace of decline may slow, post-tax returns from fixed income avenues may not beat inflation. Only if you are approaching retirement, should you devote a large part of your portfolio to debtlinked exposure. For youngsters and those in 30s, fixed income investments in provident fund already accounts for a significant amount.
Unfortunately, gold as the king of commodities has had a rather staid 5 years. Gold is no longer the zeroloss asset class that one could blindly put money in. The performance of gold during 2007 and 2011 lifted expectations. Those hopes have come crashing down, as equities started marking a turnaround. In 2013, gold lost 19 per cent and in 2015 it shed over 6 per cent. A risk-on environment as well as a high probability that the Federal Reserve will raise rates three additional times in 2018 will weigh on gold prices. In 2018, buy gold bonds rather than plain-vanilla gold. These bonds give guaranteed additional interest and also allow you to ride the gold boom. Conclusion: Investors must consider asset allocation, rather than putting all their eggs in one basket in 2018. Using the skill of investment advisers expertise and craft of professional investment managers for a fee, we are confident that investors, large or small, can get good risk-adjusted returns over the long-term.
(This article was first published in the December issue of Entrepreneur Magazine. To subscribe, click here)