When the US sneezes the world catches cold

The US economy is expected to witness growth rates of 1.5% to 2.0% which is about 0.5% lower than what was previously expected. The US economy needs to log in growth of 4% in order to bring down bring down the unemployment rate to 6.0% which is considered alright by economists. The unemployment rate for the US stands at 9.1% in July which is an improvement over the June figure of 9.2%. Although the latest job data has shown improvement the economic growth logged in by the US has fallen for four consecutive quarters and is likely to be anemic for sometime going forward.

Standard & Poor stripped the U.S. for the first time of its AAA rating. The U.S. has held on to its triple A rating since 1917 and had faced the chances of downgrade from rating agencies only once in 1995 when Bill Clinton was the President. S&P downgraded the U.S. government's credit rating as it felt that the recent plan worked out to raise the federal debt ceiling fell short of what is needed to stabilize the long term finances of the country. S&P was the only rating agency amongst the big three to downgrade the US debt rating to AA. Fitch Ratings and Moody's Investors Service have decided to retain their AAA rating for U.S. debt for now.

While Fitch has refrained from commenting on downgrade, Moody warned that they would also follow suit by 2013 if the US didn't do more to reduce its debt which stands has gained mammoth proportions and stands at in excess of $14.3 trillion.

As far as negative impact on equity market is concerned we feel that the movements caused by the downgrading would be temporary in nature and after the dust settles markets would once again focus on fundamentals which remain reasonably strong.  We would urge investors to make investments in the market in a gradual manner as stocks are available at very attractive valuations.  The only caveat to making investments at this juncture would be that one should have a long term view on the market as the volatility is likely to continue in the short term at least.

In words of legendary investor Warren Buffet “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.

By Rajat Gupta – Research Analyst – Concept Securities Pvt. Ltd

Where to should one invest Funds over the next 5 years in order to get the best returns?

If one desires to optimize the rate of return or have the most gain while maintaining some diversification, where should one invest?

Generally one might invest in commodities, real estate, fixed income, or stocks.  Stocks or equities still offer tremendous upside and will probably provide higher returns than commodities, real estate, or fixed income over the next 5 years.

In case of fixed income securities as the name suggests provides investors a return in the form of fixed periodic payments and the eventual return of principal at maturity. The Indian bond market is likely to remain volatile in 2011 with the central bank’s fight against inflation keeping the markets guessing on the extent of further tightening. However, with the effective front loaded tightening by the central bank, market yields discounting a fair bit of inflation worries and more importantly real rates finally moving into positive territory, returns from the fixed income market are likely to be attractive for investors with a medium term horizon. However we believe that if one has a long term outlook of a minimum 5 years equity still remains the best bet for providing superior returns.

The domestic real estate outlook remains murky as combination of high real estate prices and interest rates are leading to a slowdown in the market. The real estate market in India posses its unique set of problems for investors such as lack of transparency regarding property titles, high component of black money involved in the transactions etc. In addition real estate investments are plagued with illiquidity and investors may not be able to sell the asset in case any urgent need arises. Hence in our opinion investing in equity makes more sense if one is willing to live with volatility in the short term and has a long term investment horizon.

The International Monetary Fund (IMF) forecasts commodity prices to rise at 5.8% this year and 1.6% during the next year. Global commodity prices which had rallied on the back of the quantitative easing under taken by the US Federal Reserve have begun to weaken due to the gradual withdrawal of quantitative easing (QE-II) measures. The prices of some key commodities have receded to their early CY11 levels.

Taking all these factors into account equity remains the best bet for providing the highest returns if investors have an outlook of a minimum of 5 years and hence would urge investors to make equity a large part of their asset allocation strategy. A generic rule would be to allocate 100%-Your Age to equity. The rational being that when one is young one can take higher risk associated with equity investment. 

By Alok Basrur – Research Analyst – Concept Securities Pvt. Ltd