Where to invest: Physical vs Financial assets

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.

 
 

 

 

 

Budget Blues: Golden opportunity to invest in equity

Budget session has brought a welcome correction in the equity markets. The correction that commenced with the presentation of Railway budget got accentuated with the presentation of General budget. However, the budget of the Union govt. cannot be blamed for the debacle. As mentioned in my last post the markets had run up ahead of fundamentals and were ripe for a decent correction. Unecessary hype was created in the run-up to the budget, disregarding the fact that the FM did not have enough leverage to offer any fresh sops to the stock market. The markets have reacted with a negative view on the budget, although the budget does not contain any major negatives for the markets. The lower GDP figures for Q3 have added to the markets woes.

The speculative positions in the market have been cut, in the backdrop of the unrealistic expectations not having been met by the FM. As indicated by me earlier, markets have corrected to reasonable levels and would consolidate around 5600 levels on the Nifty (18500 on the Sensex). According to me these levels are decent levels to accumulate good stocks with a one year perspective and with reasonable expectations of a 15% return by next budget. As speculative positions get cut, the ownership will slowly get transferred into safer hands, which augers well for the future of equity markets.

We must remember that the current budget has been presented in trying circumstances, and the FM must be congratulated for not dancing to the gallery in the election year. The most important aspect of the budget is the resolve towards imposing a pragmatic approach towards fiscal consolidation. If the FM can curb the Fiscal deficit, everything else will fall in place. This augers well for the future of equity markets. Investors are advised to put money into equities now, and wait patiently for markets to consolidate around the current levels for a while. The next major cue for the markets will be the FY 12-13 results of India Inc., which will start flowing in from the middle of April 2013.

Equity Markets poised for a correction

Indian equities have seen a spectacular run in the first month of 2013, thanks to the continued support from Foreign investors. Although the long term trend for our markets is definitely up, the market signals are pointing towards a 8-10% decline from the current levels in the short term. What are the factors that could induce the anticipated decline?

• RBI has obliged with a 25 bips Repo rate cut coupled with a 25 bips CRR cut as per market expectation. It has also indicated that there is little scope for further cuts in the immediate future.
• The major indices have been maintained at the current levels with the sector churning by large players. With the result season coming to an end there is little scope for the churning to continue.
• The advance-decline ratio has been under pressure, with mid caps showing vulnerability to hold on to the current levels. The fragile nature of mid cap momentum stocks is likely to give way to a decent decline once the front line stocks exhaust their momentum.
• The Indian economy continues to be plagued with severe supply side bottlenecks. The capex cycle is yet to pick up despite right noises by the Govt. Most of the recent policy initiatives have remained on paper only.
• The dis-investment cycle of Govt. in coming days will put pressure on the secondary market, as much of the liquidity will be sucked into the large dis-investment planned by the Govt.
• The market players will now await indications from the General Budget to be presented on 28th February. The markets would be on their tenterhooks before this major event, as the chances of a hike in tax rates is very much inevitable.

All the above factors indicate sluggishness in the markets. Investors are advised to book some profits and wait for the levels of 5600-5800 on Nifty (18800-19200 on Sensex) to re-enter again for long term.

Equity: The best asset class in 2012

It may seem surprising for many, but the matter of fact remains that equity has proven to be the best performing asset class for the Indian investor in calender year 2012 with a 25% return. Indian equity markets have been amongst the top 3 best performing markets of the world in 2012. Nifty which was languishing around 4700 levels in January 2012 will close the year around the 6000 mark. Other asset classes that have been outperforming equity in the past 3 years have given a much subdued return during 2012. Gold was able to give around 10% return but much of that is attributable to the sharp rupee depreciation. Real estate returns have also languished in the single digit range with Delhi NCR recording just 7% growth and Mumbai recording  a 4% return.

 

But most retail investors still remain a confused lot and most of them may not have made money in the equity market. With the wild swings in the equity market, only the nimble footed investors who kept on churning their portfolio have been able to stay afloat. But the good news is that the worst is almost certainly over for equity investment, and the next bull run will gain firm foothold once the RBI starts reducing the interest rates. Investors must take the plunge into equity on every decline for a decent return in 2013 as well. The return on Gold is expected to be subdued in India, as the Indian rupee is expected to gain some lost ground against the dollar after March 2013. Real estate market will continue to give lack lustre returns for 2013, other than some surprises in select pockets of NCR region.

 

When to enter the equity market in order to make reasonable returns? At the current levels of around 19500 on the sensex and 5900 on Nifty the markets seem fully priced given the current earnings estimates. A fall of 10% from the current levels should be a good opportunity to enter the equity market. The fall may be triggered by negative news on the US 'Fiscal cliff' issue or the escalation of Euro zone crises. Indian economy has seen its worst performance already and is ripe for a rebound in Fiscal 2013-14. Easing inflation, Low interest rates, a stronger Rupee and stable Commodity prices in 2013 will help revive the fortunes of the Indian economy. We may see an upgrade of our GDP growth prospects in the 2nd half of 2013. Stock market is poised to take advantage of this scenario, and give reasonable returns during 2013 as well.



Equity Investment: Poised for explosive returns

Equity investors have had a raw deal in the past almost five years. The broader indices which recorded new highs of 21000 (on Sensex) and 6300 (on Nifty) in January 2008, are trading way below those levels today. It has been a volatile market ever since, where the nimble footed traders only have made profits. But equity markets are now showing signs of bottoming out and are likely to give stellar returns in Samvat 2069 and 2070.

 

Equity markets move in cycles and the tide seems to be turning in their favour now. Let us understand the factors that will trigger the revival in equity markets:

• Global Economic recovery: The turbulent times in equity markets were a direct consequence of the global economic turmoil in the past 3-4 years. US economy has shown definite signs of revival, however, concerns about the 'fiscal cliff'' remain. The Obama administration is likely to find a solution to this issue in the next six months. Euro zone is also likely to return to normalcy, despite problems of a few member nations. India and China shall be back to higher growth trajectory as inflation issues get settled.
• Interest Rate Cycle: The Interest rate cycle has already peaked in India. The Govt. of India is taking steps to control the fiscal deficit. This will result in taming inflation by the last quarter of fiscal 2012-13, and the consequent strengthening of the Indian Rupee. We should see the Indian Rupee moving towards the Rs.50 mark against the US Dollar by March 2013. This will trigger FII's returning to Indian markets in droves. Once RBI gives the signal for cutting interest rates, markets will be compelled to re-rate the growth potential of companies.
• Political Climate in India: The political climate has been vitiated with the focus on scams. The negative political cycle has almost played out and we could see the Govt. returning to the path of sustained economic growth. We could see early elections and the positioning of a progressive Govt. at the centre by the end of 2013. This would pave the way for a smart and consistent recovery in the Indian stock market.

Given the above scenario, I would be inclined to give a thumbs up to equity investment at this juncture.  Any correction in the equity markets from hereon, should be taken as a golden opportunity to invest in equity market. The markets are not likely to fall below 17000 on Sensex (5200 on Nifty). As per my conservative estimate I would put the level of Sensex at 25000-26000 (Nifty at 7500-8000) by Diwali 2014. As it always happens, some new sectors would lead the surge of the equity indices in the new bull run. I am particularly bullish on Media & Entertainment, Hotels & Travel, Export oriented sectors (Textiles & Gems/ Jewellery), Infrastructure (Roads, Ports & Logistic businesses), Power sector to lead the next rally. Investors are advised to make their portfolio with companies from these sectors. Wish you 'Happy equity investing'.

 
 

 
 

 

Investment ideas for samvat 2069

Diwali the festival of lights is also an auspicious occasion to review one's investment portfolio. Samvat 2069, marking India's official new year (The Vikrami era) has commenced on March 23, 2012. But for the business and the broker community new Samvat commences on Diwali day, when they introduce new books of account after performing 'Lakshmi Puja', the worship of the goddess of wealth. So this is an ideal time to review the wealth earned on an individual portfolio. Let us review the potential of each major asset class during Samvat 2069:

 

Fixed income Instruments: The interest rate cycle has almost peaked out and we could see a reduction of at least 1-1.5% in the benchmark interest rates till next Diwali. Bank deposits have shown a decent growth in the last year, and investors looking to invest in safe havens are advised to book long term deposits of 3-5 years before interest rates start falling. Bond market which has given a stellar performance in Samvat 2068, may remain subdued as risk appetite returns.

 

Bullion & Precious metals: Gold has lived up to the ancient proverb 'All that glitters is gold' having given around 15% return last year. Silver has also added to its lustre. But most of the gains in Samvat 2068 are attributed to the depreciation of Rupee. The Rupee has depreciated by over 12% to a level of Rs.55/dollar after briefly falling to the levels of 57/58 in July-August 2012. The fear generated out of the "Fiscal cliff' in US and the consistent support of Obama for Ben Bernanki, the global liquidity position shall remain comfortable, pushing Gold/ silver prices to new highs in Samvat 2069. Gold prices currently hovering at $1720/ounce are likely to appreciate towards $2100 mark in a years time, marking a gain of 20%. But the impact in India will be muted as Rupee is also likely to strengthen by at least 10% once the Indian govt. is able to fix its fiscal/ trade deficit. We could see rupee/ dollar parity of 50 by March-April 2013.

Real Estate: Investment in property has yielded super normal returns in the past 3-4 years. But the growth has slowed down in the later half of samvat 2068. The realty market is currently overheated due to excessive speculation. Dearth of genuine buyers in the market does not auger well for the orderly growth of this market. Social activism is exposing the nexus between businessmen and politicians in garnering real estate at rock bottom prices and then jacking up the prices artificially to make super normal profits. There has been a tendency amongst builders to offer more and more luxury projects without adequate demand to support the high prices. Real estate market, other than the affordable housing, is headed for a massive slowdown in Samvat 2069.

Equity Market: Equity market has given a return of around 9% in Samvat 2068. However, from the view point of the small investor markets have hardly moved between January 2008 to Diwali 2012. The broader indices have yet to top the highs (21000 on sensex and 6300 on Nifty) made during January 2008. This is precisely the reasons small investors have shun the market. The markets have gone up in the recent past mainly on the back of FII investments. FII's continue to be bullish on the Indian equity market. small investors are advised to follow the FII's as the bad times in the markets are over. The next major bull run will be triggered by the announcements of interest rate cuts by RBI in the last quarter of current fiscal. Markets could test the earlier top of 6300 on the Nifty during Samvat 2069. The volatility will, however, continue and the markets may move in a broad range of 5200-6400 on Nifty till next Diwali. Investors are advised to enter near the lower end of this range for a 20% return within a year. I shall discuss in detail the prospects of equity markets in my next post.

I wish all investors a very fruitful Samvat 2069.

US Presidential Election 2012: It's implications for India

Hopes are running high as US votes to elect its 45th President. Mitt Romney of the Republican Party would be the 45th President of US if he wins the November 6th electoral battle. Barack Obama seeking 2nd term as a Democratic party candidate is on a shaky wicket on the eve of the elections, despite a strong last ditch effort by former President Bill Clinton in his favour. Obama has also tried his level best to turn the tide in his favour by the sympathetic handling of the situation arising out of 'hurricane Sandy'.

What are the implications of this electoral battle for India? Barack Obama inherited a weak US economy from his predecessor George Bush, but has not been able to bring back the US economy to its past glory. Unemployment and jobless claims have risen to new highs under Obama administration, even as the economy grows at a paltry 2.3% p.a. Obama the Lawyer-politician faces a stiff test from Romney the Businessman-politician. 1947 born Romney is much older than 1961 born Obama. Will the US public choose a more experienced man over the youthful Obama?

Obama's policy towards India has been a mixed bag. In rhetoric he has defended India against its rivals China and Pakistan, but has done precious little to re-enforce his stand. His policy of appeasement towards Pakistan has left India high and dry. He has often supported China at the cost of long term US interests, for short term gains for US treasury. Mitt Romney is far more outspoken about his views on China, it remains to be seen how he behaves towards China if elected. Obama who has had a restrictive Visa regime for Indians, has been an obstacle in India's entry into certain areas in the US economy. Mitt Romney has taken a liberal view on Visa for Indian nationals. 

Although it is going to be a photo finish I shall put my money on Romney, because he could be a better option from India's perspective. A victory for Romney could provide the US economy a much needed booster with an immediate uptick in the stock indices. Indian markets would also greet a victory for Romney. The commodity markets which have been depressed for sometime could see a strong upsurge. We could see Gold and Silver prices attain new highs by year end. However, the price impact in India would be marginal as we could see the Rupee gaining ground against the US Dollar. I would expect the Indian Rupee to get stronger towards the Rs.50 mark to a dollar in the next 2 months.