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Economic Outlook and Investment Strategy
• Investment strategies are broadly three kinds– BUY-HOLD-SELL Passive Strategy– Momentum Strategy– Contrarian Strategy or value investing
• Economic growth is cyclical • Is there any correlation between stock market
performance and economic growth?• Whether we should follow different investment
strategies based on economic outlook?
Why Economy takes cyclical growth?
• Capacity building changes supply and demand conditions excess to shortage– Ex. Cement and petro-chemical
• Innovations take place at intervals and economy gets into accelerated growth following an innovation– Eg. Internet and wireless telecom
• Government intervention in accelerating growth in one period causes some imbalance in growth and it gets corrected by slowdown
• Growth is also affected by movement of international capital flow
Real GDP Growth Rate (India)
Real GDP Growth Rate (US)
Stock Market Performance and Economic Growth
• Whether stock market reflects economic growth?– YES but not significantly– Correlation between Sensex and GDP Growth
(1980-2012) : 17.79% ; with one year lag: 8.12%– Correlation between Dow and US GDP Growth
(1980-2011) : 32.75%; with one year lag: -17.42%– Economic growth rate is partly influenced by
agricultural growth which is not very high
GDP and Sensex
GDP and Dow
Importance of GDP Level
Year Real GDP Growth Sensex Growth2001-02 5.52% -3.75%2002-03 3.99% -12.12%2003-04 8.06% 83.38%2004-05 6.97% 16.14%
2005-06 9.48% 73.73%2006-07 9.57% 15.89%2007-08 9.32% 19.68%
2008-09 6.72% -37.94%2009-10 8.39% 80.54%2010-11 8.39% 10.94%
2011-12 6.48% -10.50%
Economic Analysis and Investment Strategy
• Capital allocation between debt and equity is primarily driven by economic analysis– Previous table shows it doesn’t make sense to
invest in stock market during economic slowdown– Investment debt products or fixed deposit makes
sense– Challenge: Slow down confirmation comes after
six months and by then market is down– Early warnings come around first quarter end– Slow down sustains
Momentum Strategy
• Momentum strategy makes sense during economic boom time
• Momentum indicator gives buy signal only during economic growth
• A simple moving average based momentum strategy captures nearly 70% of the high-low difference
Contrarian Strategy
• A strategy that requires one to buy when others are selling and sell when others are buying is contrarian strategy
• Example: Investing in low P/E and P/B Stocks• Investing in industry leader stocks• Challenge: Strategy yields maximum profit if
investments is made towards end of the slowdown
• Risk: Timing and waiting period
Defensive Strategy
• Some investors prefer defensive stocks during economic slowdown
• Stocks in pharmaceutical, food processing/ FMCG, power, stocks with low beta, etc., are generally considered as defensive stock
• Many times, defensive stock may not decline much but it may not offer positive return during economic slowdown.
Investment in Commodities and other Assets
• Commodities offer positive inflation adjusted return slightly lower than stocks but more than bonds
• Commodities are negatively correlated with stock market; performs better than stocks during economic slowdown
• Gold, silver and real-estates are low-risk class assets and hence long-term return is low– Performs better than stocks in economic slowdown
Economic Outlook
• It is difficult to get consensus on future economic outlook
• Going by recent history, stock market will offer a great return if economic growth rate turns to above 9%– Below 7% will be disaster– Between 7% & 9%, positive but unattractive return– In 2012-13, we will be between 7% & 9% mainly
because of agricultural growth and foreign inflow
Economic Outlook
• Whether India will return to 9%+ growth in 2013-14?– Chances are 50%-50%– Hopefully, monsoon will be good after two below-
average years– Improvement in global economic outlook– Risk: Political uncertainty– We don’t have any concrete information at this
point; one can at best make a guess
GDP Growth Estimate
Country World GDP Estimate (2013-2017) (in billion dollars)
2013 2014 2015 2016 2017
United States 16,221,378 16,940,567 17,783,568 18,705,028 19,704,590
China 8,777,203 9,641,851 10,581,052 11,598,974 12,713,864
Japan 6,060,834 6,207,665 6,372,229 6,531,077 6,695,692
Germany 3,581,127 3,664,333 3,741,142 3,817,262 3,893,038
France 2,786,975 2,884,648 2,984,399 3,088,502 3,197,995
Brazil 2,520,621 2,690,753 2,871,852 3,063,788 3,267,904
U K 2,577,739 2,705,960 2,850,733 3,000,967 3,167,533
Italy 2,090,254 2,118,571 2,157,870 2,203,220 2,248,397
Russia 2,310,820 2,473,675 2,658,919 2,868,421 3,105,810
India 1,961,655 2,163,541 2,384,470 2,628,926 2,906,487
What should be investment strategy?
• Risk averse investors should rely on fixed income investments like fixed deposit or bond fund– Inflation adjusted after-tax return will be very small
but still you are not incurring loss• Risk takers can invest in market since the
probability of economy growing below 7% is very low– One can expect a return of 10% - 15% during 2012-13
• Long-term investors can try contrarian strategy• Performance of NIFTY Stocks in pre and post slowdown
Which sector to focus?
• India ignored infrastructure for a long-time• Next super-growth trigger for India is
infrastructure• Industries related to infrastructure (steel,
cement, construction, power, etc.) can be focused
• Growth also brings vibration in the economy and many other sectors will also benefit
Thank You
