Realty Bytes: Are we headed for a crash?

The Indian property market has been booming since March 2005, when the UPA government decided to liberalize foreign direct investment norms in real estate and introduced the SEZ Act 2005, and allowed private equity funds into real estate. While the sub prime crises engulfed the US in 2007, leading to a crash in US property prices and a contagion affect in Europe, Indian property prices stood firm.  Real estate in India has bucked the trend of non-performing asset classes. Property prices have outperformed equities, currency and bonds by a wide margin in the past 5 years. India ranked second out of 50 countries in annual growth of residential prices, in Knight Frank’s latest global housing price index, the average property prices rising by over 22%. The average price of the Indian real estate pie has almost trebled in the past decade. A valid question being asked by almost everyone looking for property in Mumbai, Delhi or any of the other city where real estate prices have spun out of control, is about real estate bubbles in the Indian property market. A real estate bubble happens when the cost of homes climbs unrealistically fast, overlooking the affordability factor.

 

Is the euphoria in real estate prices sustainable in the long term? The most convenient argument in favour of high real estate prices is that land being a scarce resource its demand will always outstrip supply. But some important facts discussed below deserve some merit:

• Huge inflow of black money in the Indian real estate sector has avoided a sub prime like crisis, as most lenders finance only the book value of the property which does not take into account the black money. This acts as a buffer for the lender in case of default, and also acts as a deterrent against wilful default as the borrower's actual stake in the property is fairly high.
• In a slowing economy income levels have not kept pace with the rise in property prices leading to a reduction in end user demand. The increasing presence of speculators is keeping the prices artificially high. About 65% of flats in Delhi and 35% in Mumbai are in possession of speculators according to Jones Lang La Salle.
• Rental yields at 2-3 percent compare unfavourably with fixed deposit rates of 8-9 percent. With inflation at a high 7-8%, holding on to property will become increasingly difficult given the high interest rates.
• Unsold inventories in major metros like Mumbai and Delhi NCR are giving ample signals for an impending crash like situation. A report by real estate consultant Knight Frank has revealed that Mumbai has more than 80,000 flats lying unsold. This is in addition to another 50 to 100 thousand flats which are vacant, but not available for sale. Another study reveals that over 61% of the allotted flats in Gurgaon are lying vacant.
• Builder cartels are playing games to keep the prices artificially high. A few units are released under a pre-launch plan and new escalated prices are announced at the time of official release to create liquidity for initial investors. Recent liquidity released by Central banks has been responsible for success of the builder-speculator game plan.

In the days to come the liquidity position will become tight as European crisis comes back to occupy the centre stage again. At that stage the supply and demand mismatch shall force distress sales from builders straddled with unsold inventory. As the spiral of downward trend in property prices extends, distress sales from speculators will increase the supply leading to a further fall in prices. In the given situation, property prices are vulnerable to a crash in the prime markets of Mumbai and Delhi-NCR. There is a possibility of property prices correcting up to 15-20% in these markets. Tier 2 & 3 cities may avoid a major downfall as there is still genuine buying demand in these cities.

 

 

 

Quantitative Easing (QE3): Monster Unleashed

An ailing patient already in ICU has been put on ventilator, and the world is celebrating! The ailing patient is the Euro and it is now threatening to spread the contagion affect to other economies of the world. The announcement of QE3 by US Fed chairman Ben Bernanki has sent the world equity markets soaring and Gold-Silver scaling new highs in India. Other commodities including Crude Oil are also in a celebration mood. Taking a cue from Bernanki, Manmohan Singh Govt. has also announced a few reform oriented measures terming them as a 'bold initiative'. No doubt, the markets are celebrating, but is this euphoria justified?

 

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money, in order to inject a pre-determined quantity of money into the economy. Following the stimulus measures announced by Draghi of ECB, it is the third time the Fed has gone to extreme measures to inflate the money supply, and thereby increase economic activity. The Fed announced its plans to buy up to $40 billion worth of mortgage bonds each month from now until the end of the year.

 

Quantitative easing may cause higher inflation than desired if the amount of easing required is overestimated, and too much money is created. If QE3 misfires US could slip into a zero growth territory as Japan suffered in the past decade due to deflation. QE3 has the potential to disturb the apple cart of economies like India who import 70% of their oil requirement. Oil prices and other commodity prices are likely to zoom as the excess money printed by central banks finds its way into the commodity markets. One asset class that is sure get benefited will be the precious metals like Gold and Silver which may touch their lifetime highs by the end of the year, as US $ comes under pressure. The Indian Rupee should show some strength but its upward movement against the dollar would be capped by the huge fiscal deficit which is likely to be around 6% of GDP.

 

The stock markets which are showing strength are ignoring the negative impact of QE3 as discussed above. Investors should take this opportunity to book some profit around 5700-5800 on Nifty, as the markets would start correcting soon as the perception of traders undergoes a change once they do the reality check. The reform measures announced by the Govt. will also face much criticism from the opposition and some of them may have to be rolled back or put on hold. The euphoria in the equity markets does not stand merit given the fragile nature of Euro zone, which will have a negative impact on Indian economy in the short term. Equity investors need to adopt a cautious approach, albeit investment in gold would be a smart choice at this juncture.

CAG Bombshell: Can the markets survive the shock?

Govt. auditor CAG has lobbed not one but three bombshells by submitting reports related to Coal block allocation, allocation of UMPP projects and Delhi airport development, putting the combined notional loss at over Rs.3,00,000 crore. The negative reaction of the press and the opposition to the reports has pushed the economy in the grip of a major crisis. The extent of damage these reports can inflict on the health of the economy is unprecedented. The basis of fixing the notional loss itself is fraught with grave consequences for the future of Indian economy. The voices of cancellation of the entire coal blocks allocated by UPA II can send shock waves for the investment climate in the country. It is like pushing the country back to the dark socialist era where private enterprise was treated as a curse for the economy. The GDP growth rate which has already slipped to 5.5% for the first quarter of FY 12-13 can slip below 5% if the current logjam is not resolved with a sense of urgency. The captains of Indian industry led by Deepak Parikh have expressed anguish at the current state of affairs.

 

I have a feeling that CAG and the main opposition party BJP will have to share the blame for pushing the country towards anarchy. History will never forgive them for the blunders committed by them. CAG on its part has presented an unrealistic view of the situation by sensationalising the figures quoted by them. Development of the country has a cost but the cost has to be calculated realistically. How can we auction a scarce commodity like coal which is the main input for producing power for a power deficient country like India. Can anyone imagine the price of a unit of electric power if the coal blocks are auctioned as per the figures put out by CAG. Will the people of this country be able to meet the increased price of power? CAG has also failed to appreciate the difference between an administrative decision of coal block allocation and the criminal nexus between govt. officials/ ministers and the private sector mining companies. The law of land is strong enough to punish such criminal nexus. Media should also focus only on such criminal acts and refrain from painting the entire picture as ugly. CAG has also woven a web of controversy around one of the best examples of PPP- Delhi International airport (DIAL). Does CAG want to say that we Indians do not deserve any world class projects!

 

The role of the principal opposition party BJP is even more circumspect. It has failed to uphold the basic tenets of parliamentary democracy leaving the parliament paralysed for several days and weeks. The cost of running the parliament for one day comes to Rs.2 crores. Can BJP tell this country who is going to bear this cost. In the bargain BJP is fast losing its credibility in public and may loose the status of the principle opposition party in the next election. BJP is primarily responsible for making mockery of the system. Its top leader L.K. Advani has already conceded defeat by tweeting that Third front will form the next Govt. at the centre, and both Congress and BJP will bite the dust in the next elections. I am afraid the time is running out for both the Govt. and the opposition to rescue the country from the mess that the political class has created. People of the country are losing their patience and the consumer confidence is touching new lows. Our politicians must rise above partisan politics to salvage the dwindling image of the country, before it is too late.

 

Even in such circumstances our equity and commodity markets have been holding on steadfastly. Gold and Silver have touched new highs due to easy liquidity being pumped by the western economies. The markets will definitely react to the political crisis in India. But the chances of a major fall is ruled out. The new range for our equity market would be between 5100-5800 on the Nifty till the end of the year. Any dip in equity prices should be considered as an opportunity to invest for long term. Luckily for our economy the monsoon has revived smartly in August and the rural demand is robust. Fall in consumer prices will be the major trigger for easing of interest rates by October end. The signals from nature and world markets are extremely positive, provided CAG and BJP can do some soul searching to help revive the fortunes of our economy.

Monsoon deficiency spells doom for the markets?

The importance of monsoon for the Indian economy is well known to the world. This year monsoon has played truant thus far, and this does not auger well for our economy and the stock market. For the first time we have the official word on GDP growth falling below the 6% mark for first 2 quarters of FY12-13, both Kaushik Basu and Montek Singh Ahluwalia have echoed this negative outlook. The monsoon deficit for the months of June-July has been over 20% of the long term average. RBI monthly review has also laid emphasis on the inflation factor which is likely to worsen in the absence of adequate rainfall. Almost 50% of our arable land is in the grip of the worse drought in past 10 years.

So far the markets have turned a blind eye to the monsoon factor, in the hope of some big ticket reforms from the Govt. World markets have also held firm in the hope of the elusive QE3 package. But these hopes are diminishing day by day and our stock markets will react to the extremely negative growth outlook sooner than later. Indian economy is plagued with an unusually high fiscal deficit coupled with high inflation and higher interest rates. In such a scenario the broader indices are likely to crack by 10-12% in the near future, but the impact would be severe on the monsoon sensitive sectors that are highly dependent on the rural demand. Investors are advised oi steer clear of these sectors: Banking & Finance, Agrochemicals & Fertilisers, Auto motives & Auto components, and FMCG.

Now for some crystal gazing through Astro analysis. As written by me in my earlier posts the first phase of monsoon was predicted to be bad. But there are signs of a recovery in monsoon rains towards the fag end of the monsoon season in the month of September. The impact of the late recovery would be seen in the performance of the companies from 3rd quarter of FY12-13, which may coincide with the much awaited rate cuts by RBI in Sept.-Oct 2012. The second half of the current fiscal could see a remarkable turn around in the fortunes of the Indian economy. Investors are advised to utilise any downturn in the equity markets to invest into their favourite scrips. In the past few years Real estate and Precious metals have given sterling performances, but 2013 promises to be the year of Equity investment.

What ails the Indian economy?

We may take solace by blaming the international developments for the mess that we have created around the growth prospects of Indian economy. The commonwealth games scam, about a year and a half ago, that laid the foundation of a policy paralysis in governance, has spread its tentacles too far and way  beyond the imagination of most analysts who were banking on the 'India shining' theory. We may take pride in the fact that we still continue to grow at 5.8% annually as compared to the widespread recession in the Euro zone. But the fact remains that we have not grown to our full potential. The average Indian has become too pessimistic about the economy, thanks to the lack of governance, and this is telling on the GDP growth. The major factors contributing to the gloomy scenario are discussed here-under:

• Over reliance on 'foreign money': Indian economy has achieved sustainable growth in the past on the back of the high savings and investment rate by the households. The savings and investment has suffered due to the cautious approach of the Govt. and lack of enough incentives to promote 'investment skills'. Most Indians still invest a bulk of their investments in unproductive assets such as physical gold and real estate. This not only hampers the availability of funds for growth but is also a big deterrent in curbing the menace of black money. The govt. on its part has not given enough incentives to the local population to encourage investment in growth avenues. As a result of this many development projects are suffering from lack of capital. Secondly, the companies that raised overseas funds to fund their growth have hit a debt trap with the depreciation of the Indian rupee.
• Irresponsible politics: The ruling party, its allies as well as the major opposition party have been at loggerheads with one another. Their irresponsible behaviour is responsible for the ongoing policy paralysis. The so called 'Civil society' movement has also played havoc with the economic decisions, as their members are now indulging in cheap gimmicks to attract public interest. These people must remember that power without responsibility is even worse than the corruption issues that they are highlighting. The decision making process of the govt. has been virtually suspended due to illogical threats by the alliance partners. An example: The inability of the Govt. to raise diesel/ cooking gas prices has lead to a distortion in fuel prices, with petrol and diesel price differential leading to confusion all around. Infrastructure, Power and aviation sectors are bleeding due the indecision by the govt.
• Inability to curb 'Food inflation': Govt.'s inability to curb food inflation has created a situation that is keeping the interest rates high and putting undue pressure on the Indian Rupee. Adequate steps are not being taken to overcome supply side bottlenecks, on the other hand raising of MSP for crops is fuelling food inflation. Most of the benefits, such as fertiliser/ seed subsidy, intended from small farmers are actually being used by middlemen.

The only saving grace for the GDP growth of Indian economy has been the services sector which continues to grow at a double digit level. With industrial production dipping into negative territory for March '12 and agriculture sector stagnating in the 2-3% range, it will be extremely difficult to achieve a growth rate of 8-9% in GDP numbers. The Govt. needs to encourage investment by Indian citizens rather than waiting for foreign investors to lead the revival.

Bad phase for Risk investment: The bad phase for risk investments is likely to continue a little bit longer. While international commodity markets have cracked, equity and real estate markets ate still holding on. Any negative cycle in global markets is not completed till real estate prices correct substantially. Investors can look forward to a substantial correction in real estate market as supply-demand distortions reach dis-proportionate levels. Equity markets could make the final bottom thereafter. this entire cycle is likely to be completed in the next 4-6 months, thereafter it will be a smooth ride for equity markets. This could well be the final phase of the downturn which would lay the foundation of the next bull run in equity markets.

Is the India growth story over?

With the declaration of India's quarterly GDP numbers last week everybody is asking whether the India growth story is over? The situation has a number of similarities with the gloom that prevailed during the latter half of FY 2008-09. India's GDP for FY 2011-12 has plummeted to 6.5%, lowest in last 7 years and even lower than 6.7% recorded during 2008-09. The Jan-Mar '12 quarterly growth comes at a paltry 5.3%, way below expectations of analysts. This led to a prompt call by international rating agencies for further downgrades in earning prospects of Indian economy for future quarters.

Investors are turning jittery as their portfolio's bleed. At this juncture, I would like to reassure the investors that this is not a good time to exit equity and other risk assets, but to prepare towards building a decent long term portfolio in the ensuing downturn. I always maintain that one's ability to analyse the future with reasonable accuracy is the key to make money in equity markets.The reasons for the current gloom in the markets was analysed by me and advised to you during by blog posts in the past 3 months, and presently all of those negative factors have almost played out as detailed below:

• Governance deficit/ policy paralysis has taken its toll on the GDP numbers. We have gone through a tough phase in Indian polity with a lame duck govt. and an irresponsible opposition playing havoc with economic issues.
• Indian Rupee has weakened the most amongst peers as it touched a lifetime low of 56.5/ $ during last week.
• Inflation continues to be stubbornly high, with food inflation refusing to come down. This leaves little room for RBI to lower interest rates.
• Global slowdown has accelerated further, with Euro zone crises coming back to haunt the markets. Chinese demand slowdown has hit the scenario of commodity demand tapering off.

However, when we have a closer look at the above issues, we would be able to see a silver lining for the future. With the Govt. pushed into a corner by the opposition and its allies, it may see it as a last opportunity to salvage its position with some bold reformist measures. We could witness a slew of reforms after the conclusion of presidential elections in July. Indian rupee after a massive fall is now poised for a consolidation in the 54-56/ $ range, given the oversold market conditions. Inflation will slowly start to move down with the progress of monsoon, and the fall in prices would accelerate after September '12. The euro zone crisis will act as a boon for Indian economy, with investors returning back to Indian risk assets once Rupee starts strengthening and inflation coming down. The fall in global commodity prices, especially crude oil augers well for Indian economy.

Future of Equity markets: Indian equity markets would enter into a consolidation phase now. The market is likely to consolidate around 4700-4800 levels on Nifty and the consolidation phase is likely to continue for next 5-6 months, after which there is likely to be a sharp upturn in India's fortunes. In the worst case scenario the markets are unlikely to fall below 4531 on Nifty (the lower bottom made during Dec.'11). Investors are advised to use the fall in markets for accumulating blue chip stocks: Example: BHEL/ L&T quoting at their historic low PE multiples.

Future of Commodity markets: As indicated by me in the past, precious metals like Gold/Silver have ruled firm in Indian markets, due the support extended by depreciating rupee. With the rupee depreciation having played out markets for precious metals may slide substantially during the next couple of weeks. Crude Oil has already slumped over 20% from its peek.

Equity investment will be best bet in Samvat 2069

With the pall of gloom setting on the economy investors have started pulling out money from the Indian equity market. There is a panic situation engulfing the equity markets. If past history is analysed such situations lay the foundation of a sustained bull run. The most important mantra for making money on the stock market is one's ability to predict the future events with accuracy. Stock markets always discount the future in advance. As I had indicated in my last post, the situation was turning grim for the equity markets. The markets at the current levels of 4800 on Nifty and 16000 on the Sensex have already met my targets. But there is still some more pain to come. Indian rupee has dipped to 54.50 against the US dollar, and is likely to move further towards 56-58 range as indicated by me earlier. Let us try to analyse the movement of equity markets during Samvat 2069.

The Hindu calender year Samvat 2069 has commenced from 23rd March 2012. Samvat 2069 promises to be a year of extreme volatility for the Indian economy as well as equity markets. The prices of essential commodities will continue to rise rapidly, putting pressure on our fiscal situation as well as leading to volatility in the rupee vis-a-vis US dollar. The dollar will also continue to appreciate due to its safe haven appeal as Euro zone totters. The current volatility in stock market is a result of the movement of Jupiter from Aries to Taurus. This transition period that started from 4th May 2012 will continue up to May 29th. Equity markets are likely to make a bottom during this period. The current bottom is likely to be higher than the level of 4531 on Nifty which the Nifty touched in December 2011. Once a higher bottom is confirmed, equity markets would return to some stability after 29th May 2012. Thereafter it will be a phase of prolonged consolidation for our markets with markets moving in the 4700-5400 range for the next 4-5 months. A sustained uptrend is indicated only after 14th November 2012. Samvat 2069 also promises that equity indices will touch their previous high (6300 on Nifty, 21000 on Sensex by March 2013).

Retail investors must utilise the current opportunity to enter equity market with a 1 year plus perspective, and do not panic during the ensuing volatile phase to make excellent profits during Samvat 2069. The reasons for Indian equity markets returning to their past glory after November 2012 are analysed below:

• Rupee would start strengthening after making lows of 57-58. It is likely to come back to levels of 49-50 by March 2013.
• Inflation, specially food inflation, will start its downward journey from October 2012, after a good spell of monsoon in the 2nd phase, drought conditions are likely to prevail up to June 2012.
• Major industrial commodities will lend stability to markets. Crude Oil shall continue its downward spiral easing pressure on India's BOP situation.
• RBI will have to postpone its next rate cut till October- November 2012. Consequently, the quarterly results of India Inc. would show an uptick only from December '12 quarter.
• The govt. would show some semblance of stability after the completion of Presidential elections. The possibility of a mid-term election, if any, shall also be resolved by November 2012.
• Major electoral processes world over shall be completed by January '13 with the US presidential election, this would lend stability to the world markets.

Keeping in view the above analysis, investors may get into equity markets now, provided they can tide over the consolidation phase over the next 4-5 months. The risk reward ratio at the current levels is extremely positive, with the downside restricted to 5% and the possibility of a 30% gain from current levels in the next 9-12 months.