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Did you make money in 2013? - Outside View by PersonalFN

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Did you make money in 2013?
Jan 2, 2014

It's time to say "goodbye 2013" and welcome the New Year. Many of you must be writing down New Year resolutions. It is important to make a list of things that you want to do next year. Many people swear to give up things that they believe they shouldn't be doing. At the same time, there are a few others who want to inculcate some good habits in the New Year. Rarely, you might have heard someone saying that he wants to be a prudent investor. It takes discipline, vision and patience to be a good investor. Those who get lured by the market momentum and become all of a sudden risk averse when markets start falling, often lose money. It is important to remember that not every passing year is the same for markets.

Take an example of the year that has just passed. To start off, Year 2013 appeared to be a good year for risk-taking investors as market sentiment was positive and there was a momentum going for equities. But indeed, for many investors, the year 2013 might have been a difficult one, especially for those who can't deal with volatility. Macro-economic scenario remained uncertain which affected the market sentiment. All major asset classes, such as equity, debt, gold and other commodities witnessed wide swings. Possibility of winding down of monetary stimulus programme in the U.S. and rising yield on U.S. treasuries didn't only cause dollar to move up but also affected the movement of other asset classes in a big way.

Developed markets dominated emerging market in 2013. While Equity indices in the United States, Japan and Germany touched new highs; 3 among 4 BRIC nations (Brazil, Russia, India and China) saw negative returns on their prime indices. It was only Indian markets in the BRIC pack which generated positive returns. Unfavourable economic developments affected the performance of these markets to a great extent. Developed markets rallied as economic recovery was perceived to be positive in the U.S. and in the Germany. Favourable political developments in Japan and Germany helped markets extend gains. In contrast to devaluation of Japanese currency which was positive for Japanese markets; falling rupee exposed weakness in Indian equities.

Performance of Global Equity Markets
Data As on December 20, 2013
(Source: ACE MF, PersonalFN Research)

But later in the last couple of months of the calendar year Indian equity markets scaled to a new high, but remained extremely volatile. The new high made by the Indian markets looked pale as there was no euphoria on the retail side. Retail investors kept off equities considering them too risky. Mutual Funds remained net sellers for major part of the year and faced continuous redemption pressure throughout the year.

Mutual Funds: Took a Bearish Call
(Source: ACE MF, PersonalFN Research)

As revealed by the table below, large caps outperformed midcaps over the 1-Year period. However, in the past 3 months, mid and small caps gained smartly. Although the category of large cap funds has outperformed the broader market index S&P BSE 200, it has lagged behind S&P BSE Sensex. This suggests that, within the large cap space too, the major buying was confined to a few big corporations. Nonetheless, all equity oriented diversified mutual funds outperformed comparable indices.

How Equity Oriented Funds Fared?
  Returns (Absolute %)
Category Average Returns 3 Months 6 Months 1 Year
Largecap Funds 8.7 11.8 6.4
Mid & Smallcap Funds 19.6 15.7 4.8
Multi-Flexi-Opportunities Funds 11.7 13.3 5.9
S&P BSE SENSEX 6.0 12.4 9.7
S&P BSE 200 7.9 10.6 5.1
S&P BSE 500 8.6 10.5 3.8
S&P BSE Mid-Cap 17.5 9.1 -5.9
S&P BSE Small-Cap 16.8 11.4 -13.1
Data As on December 23, 2013
(Source: ACE MF, PersonalFN Research)

Macro-economic factors that affected the market sentiment were as follows...
  • Pressure on the Indian rupee
  • Widening Current Account Deficit (CAD)
  • Probability of slippage in fiscal deficit target
  • Risk of a sovereign rating downgrade
  • Inflationary pressures creeping in yet again (mainly attributed to food inflation)
  • Hike in policy rates
  • Lull in industrial activity
  • Slowdown in economic growth
  • Scam stories unveiling
  • Global economic factors (viz. meltdown of Cyprus's banking system, situation of debt-overhang persisting in the Euro zone and talks of possible tapering in stimulus by the U.S. Federal Reserve through a reduction in the current pace of the bond-buying programme)

On the debt side, 7.16% 10 Year-G sec benchmark bond breached the 9.50% mark during the year. Such hardening of yields was caused by a few of unfavourable economic conditions noted above. In response to sharply falling rupee, RBI had hiked short term borrowing rates to suck out excess liquidity thereby cramping down currency speculation. This move surprised markets negatively and even liquid funds generated negative returns for next few days following this announcement. Debt markets were further affected by poor economic indicators such as stagnated industrial growth, sustained higher inflation at retail level and possibility of government overshooting fiscal deficit target among others. The government has already exhausted 84% of the full year (Financial Year 2013-14) fiscal deficit target so far. These factors, when combined together, have an amplified impact on the performance of debt funds.

How Debt Oriented Funds Fared?
  Returns (Absolute %)
Category Average Returns 3 Months 6 Months 1 Year
Liquid and Liquid Plus Funds 2.3 4.3 8.6
Short Term Income Funds 2.6 3.1 8.1
Short Term Gilt Funds 2.2 2.3 7.5
Long Term Income Funds 2.1 -0.1 6.0
Long Term Gilt Funds 1.6 -3.3 4.3
Crisil Liquid Fund Index 2.4 4.8 9.0
Crisil Short Term Bond Fund Index 2.6 3.5 8.3
Crisil Composite Bond Fund Index 2.7 -2.2 3.9
Crisil 10 Yr Gilt Index 0.3 -6.9 0.1
I-Sec Composite Gilt Index 2.0 -2.5 4.6
Data As on December 23, 2013
(Source: ACE MF, PersonalFN Research)

It is clear from the above given table that yield curve remained inverted for most part of the year and liquidity crunch made short end of the curve more attractive than the longer end. Long term gilt funds remained the worst performers followed by the long term income funds. On the other hand, liquid and liquid funds beat all other major categories of the debt funds.

As far as gold is concerned, the precious yellow metal lost its sheen in the international markets and fell by about 27% when measured against the U.S. dollar. But Indian investors didn't feel the heat as much since the Indian rupee depreciated against the U.S. dollar which resulted in gold reporting a loss of about 5% as on December 23, 2013. You see, India as a nation imports gold and crude oil heavily. Any slide in the value of rupee makes imports costlier.

Movement of Gold and Crude Oil
(Source: ACE MF, Energy Information Administration - U.S.)

Indians didn't benefit due to falling gold prices and stagnant crude oil prices due to fall in the value of rupee. Costlier imports threatened to worsen the widening current account deficit. To avoid any further deterioration, Indian government imposed strict controls on gold imports. This move has started yielding desired results of late. From the high of 6.7% of GDP in the 3rd quarter of Financial Year (FY) 2012-13; the CAD has fallen to 1.2% of the GDP in the 2nd quarter of the current fiscal. Further, the problem of Balance of Payment (BoP) also has become less pressing with success of swap facility offered by RBI to banks for raising foreign capital through FCNR-B deposits. Banks attracted U.S. $34 billion between September and November 2013.

Outlook 2014....

Recent developments such as the victory of India's prime opposition party in most states in the recently held assembly elections, falling current account deficit have been propping up the markets by negating the negatives such as high retail inflation and low industrial growth. Pace of tapering of the stimulus in the U.S. would affect the value of rupee, going forward. Forthcoming Lok Sabha Elections in 2014 is the major event to watch out for. PersonalFN believes that, while you track developments on these fronts, you should not lose your focus. As a prudent investor, you shouldn't shuffle your portfolio following every news flow; but should rebalance only occasionally that too when a particular asset class slips below or rises above earmarked band. Investors would be better off sticking to their asset allocation.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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