In 2015, debt gave the best returns to investors, outperforming both equity and gold by a margin. When we say equities it largely means the benchmark indices, which we are comparing with.
The BSE Sensex was down 5 per cent in 2015, while gold was also down around the same levels. Investors in quality debt, could have got yields as high as 10 per cent in select company deposits and around 9-9.5 per cent at the start of the year in bank deposits, also taking into account quarterly compounding.
1) Interest rates are fast falling and are no longer attractive
Fixed deposit interest rates from the start of 2015 to date have fallen by almost 100-150 (1-1.5 per cent) basis points, even as the Reserve Bank of India (RBI) has cut interest rates by 125 basis points.
Today, the maximum interest rate that State Bank of India offers on its fixed deposits is just 7.5 per cent.
Also, as interest rates fall, corporate earnings are likely to get a boost, pushing stocks up further.
2) Gold will continue to be under pressure
The US Federal Reserve is likely to hike interest rates by at least 50 basis points in 2016. This is likely to keep gold under pressure. When interest rates in the US rise, investors would move money away from gold to fixed income yielding securities. This is likely to lead to a drop in international gold prices and hence Indian gold prices.
Demand for gold has also been falling. India, which is among the top gold consumers along with China, has been witnessing flattish demand. The government has also been discouraging gold consumption by issuing sovereign bonds. This is largely to reduce the current acccount deficit. This is likely to continue to have an impact on gold prices. The only reason for gold to rally in 2016, could be geo-political tensions in the Middle East region.
3) Why equities could rally?
These days equity is more a function of liquidity than anything else. We believe that Indian domestic institutions would continue to deploy large amounts of money into equity supporting and even pushing benchmark indices higher. In fact, retail investors are pouring money into equity mutual funds and the trend is likely to continue. This should sustain equities in the next one year or so.
Apart from liquidity fundamentals are also likely to improve going forward as economic recovery gathers steam. Corporate earnings may see a growth of 10-15 per cent in 2016-17, which should boost indices from here on.
While there may not be a solid run, as seen in 2014, expecting returns of around 10-12 per cent in equities is highly possible.
Conclusion for investing in 2016
Clearly, gold is unlikely to move too much this year and falling interest rates make debt a poor bet. Hence, equities may only stand out in the current year. But, we wish to emphasize that one should not expect terrific returns and in infact returns are likely to be more tempered.