Equity is the best bet for long term

Given the current scenario, investment in Indian equities is the best option for wealth creation for the next 5 years at least. The reasons to justify this argument are many;

• The resilience of Indian economy, in the aftermath of the global meltdown, has been proven beyond doubt. India has been one of the few global economies that have bounced back to the normal growth trajectory, whereas most advanced economies are still struggling to cope with the after effects of the crises.
• The Indian growth story is based on a strong domestic demand. Financial savings have been growing steadily in India and are poised to reach 16% of the GDP in the next 5-7 years. India which has a young population is likely to add over 100 million people to the working age category in the next 5 years, giving a further boost to the consumption lead boom.
• The FII inflows into Indian equity market have turned positive, and are likely to remain healthy over the next couple of years. Most developed economies are pursuing low interest rate and expansionary monetary policy, which will ensure ample liquidity in the system. The funds will continue to flow into Indian equity markets to take advantage of the high growth prospects of Indian companies.
• The infrastructure development theme will play out in India during the next 5 years. Heavy investments will continue to pour into roads, ports, airports, power, transport system as well as health and education sectors, as there is enormous growth opportunity in these sectors. The unique ID project will give a big impetus to IT spending in the country.

The moot question is whether this is the right time to invest in equity markets. Based on fundamentals our equity markets at the current juncture are in the region of 'fairly valued to slightly overvalued territory' trading at around 16-17 times forward earnings. On technical charts the markets have created a new range of 4800-5400 on the Nifty. Any dip from the current levels will be an excellent opportunity to invest for the long term. Although it is extremely difficult to predict the rise and fall of the markets, a 10% correction from the current levels will be a good time to accumulate your favourite stocks. Fortunately, the markets have started their downward correction, and are likely to move towards the lower end of the technical range suggested above. this level would take the markets into an attractive valuation zone (at 14-15 times forward PE) once again. Long term investors can loosen their purse strings at levels around 4800-4900 on Nifty, and if the correction extends beyond these levels it will be an added bonus. Wishing you happy investing times!

Emerging Debt Crisis: Who pays the price for 'Fiscal Profligacy'!

The International Monetary Fund (IMF) has issued a stern warning in the midst of a better than expected economic recovery: "The global economy is recovering from recession more quickly than expected but rescue efforts have worsened public finances, and if not reined in, will lead to a debt explosion." It has pegged global economic growth for this year at 4.2%, led by emerging economies like China and India. China is expected to grow at 10%, closely followed by India. IMF has indicated that the heavily indebted European countries should weaken their currencies to boost exports, and at the same time surplus countries like China should let their currencies to strengthen to boost domestic demand. However, this spells doom for the Indian exporters who are struggling to adjust against the rising Rupee. Surprisingly, the equity markets across the globe have so far ignored the writing on the wall. Perhaps 'liquidity overhang' has a major role to play in the current uptrend.

The economies in the Euro zone will have to start the process of fiscal consolidation soon as the debt to GDP ratio in many of these countries is close to the Word War II highs. Reducing debt to pre-crisis levels would require many painful steps including tax increases and cutbacks on core government programs like social security. The tax payers will have to share the brunt of the fiscal profligacy of their respective governments, who have doled out largess's to save many disgraced financial institutions from bankruptcy. In the midst of all the mayhem, investors from the Euro zone would continue to pump money into the emerging markets. By and large this augers well for the stock markets in India. But the markets have, at the moment, discounted all the good news, and there is no fresh trigger for the next up move. The markets are likely to take a breather, before embarking on a fresh onslaught towards attaining new highs in the next 18-24 months. Some of the negative factors which the Indian markets would find it hard to ignore are:

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  Rapidly rising inflation: Watch word would be the progress of monsoon rains in the sub-continent, a good monsoon would help reduce the pressure on food prices. A bad monsoon, on the other hand, may lead to rising interest rates, putting pressure on the bottomlines of companies.
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  Internal security situation: There are serious threats to India's security from across the border as well as from the naxalite insurgency within. The political will of the Govt. would play a positive role in averting any major disaster.
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  Unearthing of the Financial crises: The world for the time being seems to have tide over the Dubai and the Greek financial crises, but many such crises are yet to be unearthed. Any major debt crises has the potential to throw the world markets into a tail spin.
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  Any Political upheavels in India: The union Govt. has initiated certain measures in the past which may have serious political repercussions e.g the 'Women's Quota bill', 'Creation of new states' and other such controvertial issues which can stall the process of governance.

The world economy is passing through a very critcal phase, and any delay in curbing fiscal profligacy could be detrimental for the long term health of the Global economic stability.

Simple 'Mantras' for Wealth Creation

Wealth creation is a very simple exercise in reality, but many people have a tendency to make it look complicated. And this complication is created by those who want to create wealth at the cost of others. This includes a host of advisors and product pushers who complicate the matters without focussing on the crux of wealth creation, that is matching resources with the underlying needs. The problem with most advisors is that they take a very 'myopic' or 'short term' view of the client's situation, without taking into account the importance of fostering long term relationships. The gullible client falls into the trap laid by the maze of information floating around in the media in the shape of short cut schemes of becoming rich overnight. But, fortunately, there are no short cuts to 'Wealth creation'. One has to practice the simple mantras to accumulate wealth steadily over a period of time. Here are five time tested mantras of wealth creation:

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  Goals need to be defined: We all have certain dreams, these dreams are the starting point for determining our life's goals. But these goals must be defined properly and nurtured towards their fulfilment. Each goal must be reasonably linked to the resources available presently as also the resources that can be raised in the future.
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  Earnings need to be saved: Indians take pride in being called a 'nation of savers'. Our net savings ratio as a percentage of GDP has consistently been over 35%. Savings is a good habit which if learnt in the childhood lasts a lifetime. We must inculcate the importance of saving to the younger generation. Regular savings provide the cushion to tide over emergency situations in life like illness, accident etc.
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  Savings need to be invested: Earnings saved is only 25% of the job done. Unless saving is invested profitably, wealth creation remains a distant dream. Many of us have never thought of savings beyond the bank deposits or guaranteed return government schemes. But, little to our knowledge, most of us are destroying wealth by putting our entire life long earnings into these schemes, as most of the appreciation in their value is eaten up by inflation. We must diversify our investments to gain in the long run. Investment in riskier assets like equity is not a bad idea, provided we understand its worth.
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  Expenses need to be budgeted: With the advent of development in the Indian economy, our expenses are multiplying fast. Many earstwhile luxeries like mobile phone and laptop have become necessities in modern life. But one must control the temptation to acquire a product unless it is matched to your need. We need to budget our expenses: a classification into essential and non-essential expenditure will help us tide over this dilemma. Most non essential expenditure needs to be foregone or at least postponed.
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  Debts need to be limited: Easy availabilty of credit often lures people to go in for non essential puchases, thus imparing their capacity to repay the debts taken. Debts must be properly analysed, otherwise we would lead ourselves into a 'debt trap', which can ultimately lead to a 'death trap'. The recent global meltdown, that ocurred in 2008-09, is a grim reminder of the reckless recourse to debt without having proper earnings/ resources to match it.

To practice these five wealth creation mantras, we need to have a better understanding of the financial world, either independently or with the help of a trusted advisor. 'Financial Wellness' is definitely a step towards attaining 'Physical Wellness'.