Sunday, December 11, 2011

Best Investment Options for 2012 - Quarter 1 and Quarter 2

We have been writing a post on best investment options for each year. Since the investment scenario is changing so swiftly, we thought it is better to write 2 posts on best investment options - one for each half of the year. If 2010 was the year for real estate, 2011 was definitely the year for Gold and Fixed Income instruments. It was raining instruments based on Gold and fixed deposits like NCDs etc. Investors got close to 14% return on instruments like NCDs, around 12% return on company fixed deposits and around 10% on bank fixed deposits. Gold had another good year though not as good as 2010 - this was surprising as most analysts were predicting a downfall, even George Soros claiming that Gold is the biggest asset bubble of all times. Gold gave a return of around 20% - much less than 30% in 2010 but still good enough as many asset classes were having a difficult time especially stock market. Stock Markets have given a negative return of 21% till date since the start of 2011 and real estate market turned sideways as well. This was understandable as last year both these asset classes gave substantial gains and it time to stabilize in case of real estate market and unfortunately, losses in case of stock markets.Only those who invested in the right stocks would have made some profit in stock markets in 2011.

It is important to note that inflation is still high so the effective return on investment is much lower. So, how does first half of 2012 look for investors and which asset classes are best to invest in 2012?

India's savings rate continues to be high and NRIs continue to send money back home - either to their parents and relatives or for further investment as the US Dollar and other major foreign currencies are at a high compared to Indian Rupee. This has been driving real estate prices till last year. However, government has firmed up interest rates significantly which has led to cooling off real estate prices. So, we do not expect real estate to give a high return in Quarter 1 of 2012 as government will be able to bring down interest rates only once the inflation is cooled down and that may take few months. Since the Indian Rupee is depreciating, it gives a good opportunity for NRIs to invest in India. US Dollar is currently at Rs 51 against Indian Rupee and is expected to touch Rs 55 in the coming few months. It will significantly boost the return if one invests for long term as these exchange rates are short term blip and Indian economy will not be able to sustain such high rates. RBI will have to intervene to appreciate rupee against other currencies.

Gold prices have been going up the roof for the last 5 years. That is understandable as the world economies were not in a good shape. There have been number of fair arguments whether there will be a double dip or not. US has been doing well in terms of jobs and other factors. However, few countries in Europe like Greece continue to be in dire need of funds. Any central agency like EU or IMF can only do up to a limit to help these countries with their debt. There have been talks of European Fiscal Union but even if it is formed, many expect that Euro will eventually collapse. If this happens in some orderly manner, it will be less disastrous and world economies may be able to cope with it and avoid double dip recession. Unless world economies are on a steady recovery path, Gold may still give decent returns as it is used as a safe haven by investors.

Interest rates have almost touched the ceiling. If RBI increases the interest rates further, it will be unsustainable for many industries. So, the interest rates offered by banks, companies and various other issues like NCDs are at a high. Investors, especially senior citizens can spread their investment in different types of fixed income instruments to hedge their risk and still make around 12% return.

Lastly, the most avidly watched asset class by investors - Stock Markets, which unfortunately was the most beaten sector in 2011. There have been no new issues of IPOs for the last 2 months and the quite a few of issues before that gave significant losses to investors. Most of the mutual funds have given a negative return - some in single digit and most in double digits. FIIs have been taking money out of Indian stock markets as they continue to hold cash in their native currencies. This is one of the main causes of Indian Rupee depreciating. India is still not in a position where it can rely on its inclusive growth and still needs foreign investment. Unfortunately, US and Europe are not doing great and if one or more countries break out of Euro, it will impact all economies and not just Europe. We do not think that FIIs will take risk of investing in emerging economies and significant investment is unlikely for first half of 2012. So, we recommend investors to be very cautious in stock market investments and do very thorough analysis before investing in this asset class.

Best of luck with your investment plans for 2012 and watch out for more posts for recommendations!