Physical assets are plant, machinery, land, building and bullion (gold /silver) e.t.c where as financial assets include cash, bank deposits, shares, bonds, marketable securities. Financial assets are used to purchase physical assets. In the past few years Indians have shown a marked preference towards holding physical assets over financial assets. It is believed that immediate past performance is a reason for marked preference for physical assets. On the other hand, ownership of Indians, excluding promoters, in Indian companies (equities and mutual funds or MFs) has steadily declined over the last two decades. If we compare the returns: real estate investment has fetched an average annualised return of 27% since 2005. Gold has also given a 20% plus return over the past 3 years. Where as, broader equity markets have still not crossed the peak attained in January 2008, several midcap stocks have given huge negative returns during this period. No wonder, retail Indian investors have moved away from equity investment. On the other hand, blue chip Indian companies have been the preference of FII's during this period. Let us try to understand this paradox, in the back drop of evaluating the future prospects of equity investment vis-a-vis investment in physical assets.
Investment in financial assets has been, by and large, restricted to bank deposits because of the reach of the banks. On the equity side, despite the presence of several stock broking outfits and Mutual fund distributors, many of them facilitate trading rather than investing. Investment in equities and MFs is perceived to be risky, where as gold and real estate get importance because of the social and cultural needs and aspirations. Equities have not caught the fancy of investors even though long-term capital gains are tax-exempt. Lack of sophistication among Indian investors has allowed higher investment in gold (despite high impact cost of buying gold in jewellery form, quality issue, limited liquidity) and real estate (despite issues related to pricing, delivery, high impact cost of transaction and liquidity). Non performance of Indian equity market in the past 5 years is also driving investor preference towards gold and real estate.
Considering the above facts where should the investor put money in 2013?. Let us analyse the prospects of these asset classes over the next 5-7 years:
- Real estate: Indian real estate market has thrived on the lack of transparency in transactions coupled with speculative investment due to high global liquidity. Investment by end users is steadily declining due to exorbitant prices. Builders are saddled with huge unsold inventory, and over 50% properties sold have been lying vacant in premium markets like NCR. This is a bubble in the making. The prices have started cooling off, and the average returns expected in large pockets will reduce to single digit in the days to come. The speculators will be forced to distressed sales as global liquidity declines. We cannot expect double digit returns (net of the holding cost) from real estate in the years to come.
- Gold: Although gold has given phenomenal returns over the past decade, the gold cycle seems to be petering out. International prices of gold are stagnating in the $1500-1600/ ounce range, but prices in India have given a 20% return in past 2 years, mainly because of Rupee depreciation. As the investment cycle turns positive from 2nd half of 2013, Indian rupee would strengthen, pushing down gold prices in India. Gold might give a negative return during the year, in such a scenario. Tough measures taken by the Govt. to discourage gold imports might dampen the sentiment further in India.
- Bank deposits: The lure for safe investment will continue to provide a reasonable growth in bank deposits despite a negative inflation adjusted return. A fall in inflation rate will be a huge positive for growth in bank deposits.
- Equity: Despite giving a 25% return in 2012, equity investment has still not caught the fancy of Indian Investor. He has been consistently selling his stake in Indian companies to FII's. Equity investment is largely influenced by the earnings cycle which is likely to turn positive from 2nd half of 2013. The major reasons for this expectation stem from a falling inflation and falling interest rate regime. New investments would spur economic growth after next general election. We could see a mid term poll during 2013. My expectation from equity markets for next couple of years is a 18-20% annualised return, and we could see equity markets/ indices doubling from the current levels in next 4-5 years. However, in the extreme short term I expect the equity markets to settle lower at around 5600 on Nifty, or little lower. A sustained up move will unfold in the 2nd half of FY13-14, after prolonged consolidation.
To sum up, I foresee a decisive shift in favour of Financial assets over Physical assets during the next 12-18 months, as the returns from Real estate and Gold languish and equity markets start to out-perform.
