India buy 200 tons of Gold from IMF

Image via Wikipedia

India is a gold crazy country,and central bank has done what most of Indians do when they have money. They buy gold.
I have always been saying that USD will correct if not against all currencies. a least against INR. most of India's reserves are in USD and in a scenario when USD corrects, gold will be a good bet. this will also diversify India's portfolio which is sitting with reserves of more then 250 billion.

Related articles by Zemanta

• GOLD HITS RECORD HIGH ON LOSS OF FAITH IN DOLLAR: "Gold prices on Tuesday surged to an all-time hig... (pajamasmedia.com)

How fast things change.
A new advertisement on TV says we create eight times more data then what is stored in all US libraries put together. Its amazing that all news channel have a different story to cover and still you always feel you don't know enough. there are so many research reports that one can spend his life time without finishing may be half of them. there is so much happening out there, all we know is a fraction of it. What we know if know is also coloured by our own beliefs, and how the story has been presented to us.

That said, let me analyse the Little i know of what is happening and with the coloured glasses i wear and then decide if i favour lot that says it is a "V" shaped recovery or a "W" shaped recovery or may be a some other funny graph that I and you can not predict. I guess the third option. Honestly markets always surprise us and when the entire market believe one outcome the actual out come is mostly different.

All predictions are same?

Image by blprnt_van via Flickr

All predictions are same?

Two years back every one on the street was bullish, economy was booming, lot of investment coming, commodity prices going up and every one who did not own property was getting poorer by the day, then all of a sudden every guy across the world started knowing at least one English word i.e. "Sub- prime", what hit the world economy about two years back still baffles a lot of people, so much so that some sceptics have started questioning if world at large should abandon capitalism and go back to socialism or something of like that. Also all predictions were clear "Markets will correct further". That's when all the liquidity propelled the markets to almost pre-correction levels.

Now when I read all the intelligent people who comment about the market it seems markets are headed for another correction, only problem is that when all predictions are similar something has to change, after all market prediction is and should not be a monotonous job. I am sure markets will surprise us and keep investing and predicting markets an interesting game. Cheers.

Related articles by Zemanta

• Michael Moore Film Ends with Communist Anthem (kylesmithonline.com)
• Market crisis 'will happen again' (news.bbc.co.uk)
• The simplest, best portfolio on earth! (dailyfinance.com)

What happens to the emerging markets when dollar starts strengthening?

Image via Wikipedia

What happens to the emerging markets when dollar starts strengthening?

A lot of money will go out of the EM because the strengthening dollar will impact your returns in those countries and of course investors would want to make returns in USD then in emerging markets.

now if you ask me i don't think that the dollar will appreciate from here on in a hurry as the Fed would have to continue with quantitative easing measures but then eventually after may be a year or two the easing will be reversed and the tightening will start, that's when i worry what's gonna happen to emerging markets and that will be interesting to see.

Related articles by Zemanta

• Fed worried about fragile recovery (money.cnn.com)
• Could China Be Right for You? (usnews.com)
• Market likely to suffer fresh falls says Stephen Lansdown (telegraph.co.uk)

Where is the liquidity world is talking about?

Image via Wikipedia

Where is the liquidity world is talking about?

Total sub prime market in US is about 4 trillion, total liquidity infused is of about 1000 billion dollar. Yes Fed is guaranteeing AAA rated securities to the tune of about 1 trillion by way of TALF, but they are guarantees only and may or may not have a significant impact on the liquidity at least in the immediate future.

also the economy will take some time to go back to its optimum level and hence the the chances of inflation coming back in a big way globally look subdued.

if that is true then USD may not see a correction yet this will put downward pressure on commodity prices and that will again ensure we have a low inflation till some time to come.

Related articles by Zemanta

• Revenge of the inflation hawks (money.cnn.com)
• Boost Bank of Canada powers: Carney (cbc.ca)
• Does the Fed Know How Many Dollars Are in Circulation? (blogs.harvardbusiness.org)

Image by Getty Images via Daylife

A good IIP number is a good news for the economy. Also because this has showing signs of improvements from some time now, this coupled with a healthy credit growth and ample liquidity will defiantly propel economy forward. I am sure the capex will start again and so the good numbers from companies.
What can really change the consumption in the economy is a proposed plan to change the tax slab from current 1.5, 3 & 5 million to 1.6, 10 & 25 million. I think following will be the implications of the change;

1. this is a fantastic news for the internal consumption, and for FMCG companies.
2. India has about 15% of the world population, and a huge middle class. A change in consumption pattern might lead to inflation
3. Fiscal deficit will surly go up; improving the number of tax payers, that the government is talking about may not be all that easy. So the fiscal deficit will go up.
4. It's a simple rule one gets money, when you have enough of it. All this money will improve savings and investments, which will in turn attracts more investments from FII and FDI.

Related articles by Zemanta

• Deficits don't have to mortgage the future (money.cnn.com)
• World population may hit 7 billion next year (cnn.com)
• Shop and save the Indian way (telegraph.co.uk)

Image via Wikipedia

Is it not a good time to sit in cash?

My answer is Yes it is. I am no way trying to say that markets are always predictable and safe, but there are times when you know that things are not clear. We are just coming out of a sever meltdown of global economy, inflation looks a certainty (Look at prices of pulses, sugar and all other commodities), monsoon is way below normal, and don't forget the H1N1.

Yes i agree that the uncertainty of the market is the reason why i write and you read and visa verse. But a patient coming out of a hospital should not just start running. The correction was sever and a bit more then warranted, but market going back to 15/16 plus PE in just a matter of six months looks a bit too optimistic.

Related articles by Zemanta

• India Gets Caught Short as Sugar Prices Soar (nytimes.com)

Disclaimers

Disclaimers: All the views in the blog are my personal views and they represent what I think and believe at that point of time. The information and the blog content may change any time in the future. All data and information provided here is for information only, Please consult your financial advisor before making any investment decision. The blog is not responsible for any loss or profit. While we take adequate measures to ensure the information here is accurate but we are not responsible for any information.

India

Image via Wikipedia

I have not been a big fan of decoupling theory, it is difficult to believe that in this globalized world one or two countries remain unaffected by what is happening across the glob. More so when the economies of the countries are reasonably open and exports are not only big revenue creators but also biggest job creators.

I was amazed with the results of most of the Indian companies. Most of them irrespective of which sector they are from have not only been able to generate healthy profits, most of them have given better results then what markets were anticipating. Even the industry growth data published in the news papers yesterday seem to suggest that the growth is back on track.

I am no way suggesting that we have gone back to the pre-correction levels of economic activity but we surly are not deg-rowing not even stagnate, in fact we look to be in a healthy shape and growing at a reasonable pace.

After looking at this encouraging data I believe that what happens to developed markets will impact India, and one might have to readjust his portfolio a bit depending on the effect of this turmoil on different currencies and few specific industries. But India will grow and outperform most of the markets on the back of a very strong internal demand.

Related articles by Zemanta

• Indian stocks surge 17% on decisive vote result (financialpost.com)
• You: Canaan Partners India: Early-Stage Investing in India (RWS Interview) (via ReadWriteWeb) (readwriteweb.com)

Markets have surprized all of us again

Image by Renegade98 via Flickr

When all expert in the market agree and predict the same thing, Something has to change

At the bottom of the markets all expert agreed that the markets across the globe are doomed and it will take at least three to four years before economy and eventually markets start recovering. But as usual, something changed. This time it was all the money infused by government in the system that changed the entire equation. Markets started bouncing and look at them now most of the emerging markets are flirting with their previous peaks.

Most of the people were not sure what will be the impact of all this liquidity and the jury is still out on whether this will lead to inflation or not, but markets have their own understanding and they decided to shrug off all the scepticism and marched ahead. With markets few experts have also shifted sides and are predicting an improvement in the economy. Lets wait till all experts agree on the market growth, that should be a good time to redeem.

Invest in Gold?

Image via Wikipedia

Invest in Gold?

well if you are an Indian, it may not make a lot of sense to invest in gold. I am not saying that the gold prices will not rise. I bet they will.

Dollar is under pressure and I am sure US Will experience high inflation in near future. That is good omen for investors in gold, but at the same time Indian Rupee will appreciate. so the same reason why gold will appreciate globally Indian investors may not be able to enjoy the appreciation.

here is the explanation.

Say for example if you need 100 Dollar to buy 10 units of gold. If Dollar depreciate than for the same 10 units of gold seller will ask for more dollar because it has depreciated in price.

Now lets see what will happens in India. suppose today you need 100 Rupees to buy 10 units of gold, and Rupee starts appreciating, than for the same 10 units of gold a buyer will be willing to offer less Rupee as the currency has appreciate.

Related articles by Zemanta

• India to Boost Spending to Spur Growth (nytimes.com)
• Gold: demand soars amid inflation fears (telegraph.co.uk)
• Design a Currency Symbol for the Indian Rupee (labnol.org)
• Gold demand soars among investors (news.bbc.co.uk)

There are three things which looks more clearer now post budget

Fiscal deficit:

A balooning fiscal deficit was expected but the magnitude proposed is a bit more then expected. Market and most of the analysts were expecting a deficit of about 6.2%, whereas the acual number is 6.8%.

Interest rates:

I have mentioned this in past that the trend of decreasing interest rates is reversing. Going forward I believe the interest rates may go up from here on sooner then latter. Total expected fiascal deficit of the governemnt in about 6.8% of the GDP and this will definatly put pressure on liquidity.

Inflation

The threat of inflation will also come back to haunt india as all the money distributed by the government will lead to consumption and will fule inflation. Governemt has also increased fule prices, CPI is already high. In my openion we are not too far away before high inflation come back to haunt us.

Budget and Market Crash

Budget and market crash

Markets went down because of burden of their own expectations, there was so much expected from the budget and the government, that it was almost impossible for the government to do all that and more to ensure that the markets go up from the point that they were.

All and all it looks like a decent budget and a few long awaited measures like scrapping of FBT has been taken. Also a renewed commitment to GST implementation guideline of April 10 is good news.

Needless to say market was expecting much more and has crashed. Market was expecting a clear road map to disinvestment, with a target. Road map on how government will reduce fiscal deficit, FDI in Insurance & retail. Tax rebate, fiscal stimulus, rebate on tax paid on home loan, reduction in taxes etc., which has not happened and markets have crashed.

What has happened though is a lot more expenditure then what India can afford to make.

On the other hand I am sure market had reached to a point from where it needed a huge push to move any higher. Now since that push is missing markets are disappointed.

Related articles by Zemanta

• Budget 09: FBT Gone; 5% Excise Duty On Set Top Boxes; Higher DAVP Rates To Stay; Reactions (contentsutra.com)
• America's Fiscal Train Wreck and Cassandra's Curse (paul.kedrosky.com)

Image via Wikipedia

Property Prices go up in Mumbai

Most of the builders after receiving QIP money and successfully restructure their their debt have come out of the troubles they were facing till about a month back.

What has also helped is return of customers looking to buy, more so in residential projects then in commercial projects.

Also this may be the end of all interest rate reductions and hence a combination of low interest rates and reasonable price may sound tempting for the prospective buyers.
The last life line builders have got is from the news that the government may increase the tax rebate available on the interest paid for the loan.

All these reasons tell me that this may just be the end of price correction in the market.

Related articles by Zemanta

• Why Rising Interest Rates May Be a Good Sign (time.com)
• India enters deflation as economy slows (myleadingleads.blogspot.com)
• Kelman: "Why The Real Estate Market Isn't a Free Market" (seattlepi.com)

Image via Wikipedia

Decoupaling
when some one first told me about decoupling I was a bit sceptic about the idea, but if last one year's returns of market are any indication then people chempioning the idea may have a point. S&P 500 is more or less flat year to date where as India and China are up more then 50% year to date.
Though one year may be too shout a time to judge wether decoupling has any substance or just one more theary which will not hold tru in long term. At the same time whatever we have seen in last one year seem to suggest that probebly in the long run also some of these emerging markets will out perform the developed countries.
One reasone can be the head room which is available to grow for emerging markets, when compaired with the world.

Related articles by Zemanta

• World Bank cautions against recovery talk (telegraph.co.uk)
• Emerging markets second wind blows in the face of shortterm thinking (telegraph.co.uk)
• IDFC Raising US$500 Mln Fund Of Private-Equity Fund (quantitativc.com)
• Why do poor nations continue to be enthralled with capitalism? (tpmcafe.talkingpointsmemo.com)

Image by Getty Images via Daylife

What if USD actually correct

We have seen what happen when USD touched 40 Rs/ Dollar, from textile companies to software to BPO's came under sever pressure. The chances are that the USD will correct again due to following reasons
higher growth in India
Excess liquidity in US
Money chasing growth and higher returns and hence investing in India and other emerging markets
If Indian Rupee does appreciate then some of those companies can come under pressure again.

This can be an opportunity

A slowdown in US economy can be an opportunity for India as most of the companies will look to cut cost and look to out source ancillary businesses.

Related articles by Zemanta

• Indian IT exports projected to grow in single digit (taragana.com)
• Obama's tax plan not seen hitting Indian outsourcing (taragana.com)
• Mahindra & Mahindra Wants to Beat Chinese to US Auto Market (businesspundit.com)

Image via Wikipedia

The latest buzz word in the market is "QIP", even if one did not know what it stands for, they were all talking about it. Some one told me two things:

1. QIP is why market has gone up so much
2. QIP is drying up the money which can potentially come to the secondary market.

Well my first observation is that they are like oxymoron, the same reason can not increase and decrease the markets. Also I am not sure if I agree with any of them.

Related articles by Zemanta

• SharesPost Report: Facebook Worth $4-6 Billion. So Much For That $10B Valuation (techcrunch.com)
• Why insure munis when you can buy them instead? (blogs.reuters.com)
• Domize: The World's Fastest Doman Name Search Engine! (netwala.blogspot.com)

Image via Wikipedia

India will become the fastest growing economy

As per the latest IMF report India will become the fastest growing economy. As the monsoon also reaching India, albeit a bit late should help the economy grow. Almost 60% of the population still depends on agriculture and most of the agriculture in turn depend on rain.

India's low dependency of about 19% on export should keeps it reasonably safe from a turmoil in global economy.

If USD were to crash as predicted by most of the analysts, This can potentially reduce our fiscal deficit as we are net importers and import most of our oil requirement, which is the biggest component of the bill.

Related articles by Zemanta

• World Bank cautions against recovery talk (telegraph.co.uk)
• India's farmers cursed with severe drought (cnn.com)

Experience is not knowledge

Image via Wikipedia

Experience is not knowledge

This is true in life and more specifically for investment, that is what suggest why so many investors with loads of experience keep repeating the same mistake.
just about three months back markets were reeling under presser of high profit booking and no one was willing to stick his neck out and buy, same people who said "sell" are now turned into aggressive buyers. Most of them have enough experience of market ups and downs, but I guess not enough knowledge.

Related articles by Zemanta

• A Guide To Investing Capital (wealthyways4you.com)
• The Best Way to Maximize Your Investment Return [Stocks] (consumerist.com)

Who will By all the bonds US will sell?

Image by Getty Images via Daylife

Who will By all the bonds US will sell?

If the US has to maintain all the fiscal deficit it currently has than they will have to print a lot of money, which has some deadly consequences.Or they will have to sell a lot of bonds to investors who are willing to invest in an economy which is slowing down and hence invest in a weakening currency. Even if they do find all the investors they are looking for, the yields will go up. This makes raising corporate debt unsustainable and hence affect the industry.

US may also choose to increase tax rates, which looks to be on the cards. But then that will severely affect industries competitiveness.

Economy

Image via Wikipedia

Inflation is back with a bang

The data released this week show a negative inflation. This is first negative data in 3 decades, since the index started. But if you study the number closely you will realise that its only WPI which has corrected, whereas CPI has moved up to double digits.

This is in complete contrast to what RBI's expectation was of CPI coming back to about 5%. A high inflation and a global slowdown is a real bad news for the economy. This also put the central bank in a dilemma. It is difficult to increase interest rates as the economy is slowing and interest rates can not be reduced because inflation is already high.

the trend of a high CPI and eventually a high WPI looks imminent. in another six months or so the base effect will also come down significantly. If central bank decides to increase the interest rate, which I think they will, the industry will feel the heat.

Equity

Image via Wikipedia

USD is standing on the shaky grounds and so is GBP. What stands to gain are Asian currencies like that of India and China. This may lead to lot of money being pumped in the these markets and may push the markets up, and governments securities' yields' down.

Also what is interesting is the amount required to take Indian markets to dizzy heights is minuscule when compared to the money which has been infused by different governments. The total FII inflows in Indian in last three months is about 4 Billion dollar, but look at what has happened to the markets. They are up almost 100% from their lows.

Related articles by Zemanta

• China outlaws virtual currency for real-world items (arstechnica.com)
• Stimulus Package..02012009 (slideshare.net)

Equity

What will happen from here on?

Apparently everything is on track again, and global markets have recovered from their lows, Crude is back with a bang and commodity prices are going up again. But the question is will all this remain hunky dowry for the next one year or the things may become difficult from here on.

Most of the analysts would believe the recovery is not on the tine ice and is standing on a firm ground, but i still have some doubts on the sustainably of this recovery.

I ask following questions and look for the answers.

Is the US fiscal deficit sustainable?
Who will buy all the government securities?
What will happen to the G sec yield?
Will the inflation come back?

Here is my understanding

Is the US fiscal deficit sustainable?
No. A high fiscal deficit would mean high taxes.
Who will buy all the government securities?
Difficult to find buyers
What will happen to the G sec yield?
Will go up, if a 4% is not high enough.
Will the inflation come back?
Yes.

So what we are looking at is high taxes, high G sec yield, which will make corporate debt yields unsustainable, and high inflation.

Now does this should makes the recovery unsustainable?
My answer is yes.

Gyan

Opportunity to sell?

Markets are a crazy place and can remain irrational for a very long time time. I feel the same when I see the markets go up every day day with some crazy amount of foreign money coming in. Trillions of dollar of free cash distributed by the governments across the glob is coming to financial assets and inflating by the day.

With an EPS of about 900, we are already at a PE of about 17. Now this may not be very high looking at the average PE of 16.5 clocked by the Indian market in last ten years. We can justify a higher PE by the composition of the index and a high ROE of Indian companies when compared to other emerging market.

My only concern is future EPS growth. The inflation last year was about 5% and real growth of about 9%, so nominal growth of 14%. From there we are looking at an inflation of about 2% and a growth of about 6% this takes it to 8% of nominal growth. This is a significant correction in the growth and if things do not improve the chances are very high that most of the Capex will not come through and we might end up loosing more jobs.

Now this is where I ask if with this kind of growth would the money keep pouring in to keep markets at high valuations?

Equity

Geography will become History

I's a really interesting statement, and I fully support this. Geography will surly be taught in history classes. A lot of people believed that emerging markets have decoupled from the developed market and a lot of investors here believed them, till the market started correcting.

I don't want to talk about the speed at which you can travel and how fast and cheap it is to communicate with people across the glob, but it is the dependence on each other. We are now like a jungle where if one animal extinct and the entire food chain is distorted.

The impact of a person loosing job in US has implications on the job prospect of some one in India, China, Philippines and other countries.

The point I am trying to make is that till global markets do not come out of the woods one should keep his expectations limited from the emerging markets. Yes the recovery will be faster and may be steeper then the developed markets but wait till you take the plunge.

Leverage

Leverage

There is one more very interesting aspect of leverage or loans. If you were getting loans it means you had enough money and you did not need it. If you did not have money and you needed it then no one will lend to you.

Look at what was happening to people before sub prime crisis happened. There was enough liquidity, people had jobs and houses, their wealth was growing because markets were going up, property prices were going up and yes there were enough people to lend them.

Ask those people now, they need money now more then ever before but how many banks are willing to lend them? None I guess.

Gyan

Leverage:

I have never been a big fan of leverage. in past seven or eight years I have hardly seen any one making money by taking leverage. I heard some one saying that if you trade excessively in the market and take excess leverage you are some who "eats like a chicken and pass like an elephant" I like the statement and I have seen many just doing that.

I think it is the cost of leverage and the returns that you get from any risky investment that tilts the bargain invariably for some one who give leverage. (though this time around even leverage givers i.e. banks also lost a lot, but they would have survived if they were not leveraged so heavily).

the only place where leverage may make sense is a house loan simply since this is cheaper as compared to other loans, but even this should be kept minimum.
leverage for investment (Yes, including investment in a house) can best be avoided or should be minimum.

So leverage is bad and here are my comments on the use
Leverage for buying a house is OK.
Leverage for investing in a house should be minimum.
Leverage for investing should be avoided.
leverage for Trading is a crime (Well almost)
Leverage for enjoying, God bless you.

Cheers

Gyan

Image by Getty Images via Daylife

An interestingq question;

Market crash is responsible for a slowdown in the economy or a slowdown for the crash? Tech stocks corrected because investors realized ".com" was not a feasible business modal or ".com" turned infeasible because stocks corrected. More often then not people tend to think and believe that it is the the market, which is responsible for the slowdown.

This phenomena is not only restricted to the markets, this happens in real life also, most of the time I have observed that the reasons attributed to certain events may not be the reason for the event. And more often then not the reason is categorized as "Good" or "Bad", depending on the outcome.

Like Sub- Prime and leverage are considered responsible for all the job losses we have seen across the glob. My question is how many of those who have lost their jobs, would have got a job at the first place, if you had removed the excess liquidity created by leverage?

Related articles by Zemanta

• SEC Moves Closer To Banning Flash Orders (huffingtonpost.com)
• Have we wasted our crisis? (blogs.reuters.com)

Privacy Policy for www.investmentgyan.blogspot.com

If you require any more information or have any questions about our privacy policy, please feel free to contact us by email at investmentgyan@gmail.com.

At www.investmentgyan.blogspot.com, the privacy of our visitors is of extreme importance to us. This privacy policy document outlines the types of personal information is received and collected by www.investmentgyan.blogspot.com and how it is used.

Log Files
Like many other Web sites, www.investmentgyan.blogspot.com makes use of log files. The information inside the log files includes internet protocol ( IP ) addresses, type of browser, Internet Service Provider ( ISP ), date/time stamp, referring/exit pages, and number of clicks to analyze trends, administer the site, track user’s movement around the site, and gather demographic information. IP addresses, and other such information are not linked to any information that is personally identifiable.

Cookies and Web Beacons
www.investmentgyan.blogspot.com does use cookies to store information about visitors preferences, record user-specific information on which pages the user access or visit, customize Web page content based on visitors browser type or other information that the visitor sends via their browser.

DoubleClick DART Cookie
.:: Google, as a third party vendor, uses cookies to serve ads on www.investmentgyan.blogspot.com.
.:: Google's use of the DART cookie enables it to serve ads to users based on their visit to www.investmentgyan.blogspot.com and other sites on the Internet.
.:: Users may opt out of the use of the DART cookie by visiting the Google ad and content network privacy policy at the following URL - http://www.google.com/privacy_ads.html

Some of our advertising partners may use cookies and web beacons on our site. Our advertising partners include ....
Google Adsense


These third-party ad servers or ad networks use technology to the advertisements and links that appear on www.investmentgyan.blogspot.com send directly to your browsers. They automatically receive your IP address when this occurs. Other technologies ( such as cookies, JavaScript, or Web Beacons ) may also be used by the third-party ad networks to measure the effectiveness of their advertisements and / or to personalize the advertising content that you see.

www.investmentgyan.blogspot.com has no access to or control over these cookies that are used by third-party advertisers.

You should consult the respective privacy policies of these third-party ad servers for more detailed information on their practices as well as for instructions about how to opt-out of certain practices. www.investmentgyan.blogspot.com's privacy policy does not apply to, and we cannot control the activities of, such other advertisers or web sites.

If you wish to disable cookies, you may do so through your individual browser options. More detailed information about cookie management with specific web browsers can be found at the browsers' respective websites.

Gold

Post recent stock market crash and then commodity and property price correction Gold is where a lot of investor found some solace. Gold has infect moved up from about 715 $/ ounce on 11 November 08, to 880 $/ ounce after flirting with a 1000 mark for some time. If you look at past movement of gold prices, it has performed well whenever there is correction in the USD. The logic is pretty simple, if the USD corrects then to buy same units of gold you need more units of USD, since USD has corrected.

Given the current economic scenario when a lot of money is being printed by the US, most of the investors believe that these trillions of Dollars infused a lot of liquidity in the system and borrowing will become cheep again, people will start buying and inflation will go up the USD will start correcting, so buy gold.

The logic's sound reasonable except if you look at the amount of money which is being pumped in the system to what is needed to clear all the sub-prime mess. The total toxic assets are expected to be around 4 trillion in US, as compared to 2 trillion which is expected to come in the system once all the fiscal packages come in the system. Off course some of the expected sub-prime money will be recovered and some of the banks may choose not to sell some of the assets they are holding, but the money being pumped is definitely not enough to wipe out all the toxic assets. Even if it is enough this will only clear the existing toxic assets held, but will not lead to consumer demand. Till consumer demand does not come back inflation will not come back.

Against which currency: currency movements are a relative term given the current economic scenario I am not sure how many currencies will do better then USD.

The other problem is high base of inflation; till last year this time, most of the commodities especially crude was at very high levels and has come down significantly since then. US is one of the biggest consumer of crude in the world and crude price correction will continue to keep inflation in US down, at least till base does not come down, which is still about six months away.

Demand-supply: The one reason why I always have a negative bias against gold is because gold can not be consumed and can only be produced. Even gold standard is scraped now so even countries can sell gold at will and continue to print currency. Also when gold prices go up retail investors tend to delay buying, in fact last time when gold prices were about 1000 $/ ounce investors in India sold their gold. Import of gold declined during that time not only in India but also in other gold importing countries like Italy, which is another large importer of gold. Now this was a surprise given the fact that India is the highest importer of gold and the yellow metal is more then just investment for them.

One must also consider the amount of gold that can be produced; I am sure we are not nearing the end of gold reserves and high gold prices and lead to more investment in exploration. Remember Hunt brothers who accumulated 50% of then silver reserves and still went bankrupt.

Gold was a fantastic investment before the gold standard was scraped, gold moved from $37 per ounce to touch a high of $850 in 10 years, and then took almost 28 years to cross the same mark. Even if you take the high of $1000 which gold touched in February 09, that’s a return of 0.6%, in real terms one is still loosing money after so many years of wait. I am sure there are better investment avenues available even in the current market scenario to invest in.

Property prices in Mumbai

Property prices in Mumbai:

Economic crash

Till about a year back a lot of investors, big or small committed millions of dollars in the property market, and were richly rewarded because of ample liquidity in the system and a general belief that Indian economy will continue to clock 8% plus growth.

Things have changed since then. Most of the analysts are arguing if the GDP will grow at 5% or 3.5%. It is sure that it will not grow by 8% plus. U.S. is in recession and sub-prime crisis has crippled the banking system in US and most of other countries. Equity and property markets in India since then have corrected.

Mumbai property market is influenced more since it is the financial capital of India and a lot of prospective property buyers are directly engaged with finance industry through banking and broking.

Expensive loan:

The biggest impact of the crises was on liquidity and risk premium attached to lending. I was amazed to see some of the Indian corporate raising cash at 12.5% to 13% from the retail investors. What this suggests is that even toady when call market yields have come down significantly; lending rates are still pretty high.

Even for retail investors it has become difficult to get a home loan, barring SBI which is giving home loans at 8% that too for loans below 20 lakhs, for most of the banks lending rates are in double digits. The other problem is down payment, most banks are asking for a higher down payment of about 30% as the margin money for property. Last but not the lease is eligibility for the loan which has also gone down from a high of about 60 times your monthly salary to about 40 times your monthly salary. All these factors put together have drastically reduced a person’s ability to buy a house. Understandably credit off take has come down significantly.

Demand supply:

One more thing that has influenced property markets is a few changes in the regulations that have increased land supply in Mumbai.

ULCA has been scrapped: an expected 25,000 acres of land should be free for development.
Approval of construction on salt pans: total area covered is about 5500 acres in Mumbai.
Auction of defunct land mills in Mumbai: total area covered about 900 acres.

(60% of Mumbai lives in slums which is about 6% of total area, that’s why redevelopment of slums may have a limited impact on the overall supply)

All of this put together give access to more then 11,000 acres of land in Mumbai. I understand that construction will not start on all the land and most of the land might takes years or may be decades before construction starts. But the land is available and even if 5% of this land is made available every year a healthy supply will keep coming to Mumbai for construction.

Parel in Mumbai is a good example of this, where a lot of supply came because auction of defunct textile mills. The total area which is being constructed there is expected to be about 16 million square feet. This is roughly 11 times of the total office area at Nariman point. If all this is occupied, BMC will have to ban cars in the area other wise traffic congestion will ensure that one never reaches his/ her office.

Investors not willing to take a plunge:

Typically property market is made up of first time home buyers, who buy a house to live in it, and investors who give it on rent or sell it for a profit. I significant number of houses are bought by investors but due to the recent correction in the property market and economic slowdown the expectation of a price correction in property is keeping these investors away from the market, this significantly reduces the number of transactions and put pressure on real estate companies who are sitting on huge inventories and expensive debt.

Tier ii / iii cities:

If you are looking to buy a property in a tier iii city, this may not be a bad time to start looking at buying opportunities. In last one year or so Indian government has done many things to put money in the hands of Indian middle class. Some of the examples are

Sixth pay commission
Farm loan waiver
Increased tax exemption limit
Treating home loans below 20 lakhs as priority sector (this has reduced the rate at which bank give these loans)

Also traditionally investors in smaller Indians cities prefer investing in bank FDs or other secure investment options. This also helps to keep property prices steady in such places

Fixed income

Image via Wikipedia

Fixed income:

With equity, property, crude and other commodity crashing, fixed income investment have attracted a lot of investment from HNIs and corporate. Last six months returns from fixed income instruments have also been very choppy, but most of the investors have persisted with their investments.

GILT:

Last year on 15 July GILTS touched a high of 9.474. There were multiple reasons like; flight of money from emerging market, high fiscal deficit, which touched a high of about 12-13% of GDP and then a bigger then expected borrowing program announced by government. All this kept GILT yields high. What worsened the situation is a high crude price especially when domestic currency was depreciating. Since then things have improved significantly. Crude has corrected from a high of 150 $/ barrel to more humble price of about 50 $/ barrel. All other commodities have also corrected. This has improved the fiscal deficit albeit marginally, but expectations are that this should improve going forward.

Inflation:

Inflation figures for the week ended on March 09 stands at 0.26%, as against 0.31% a week before. This is the lowest level inflation has touched in two decades. The figure last year same time was above 7%, which broke 11% mark in July 08 after a gap of 13 years. Going forward the expectations are that the inflation will hit sub zero numbers not only because prices are correcting but also because of a high base effect last year.

Will the interest rates come down?

The most obvious out come of deflation is a reduction in benchmark interest rates, and we have seen this in past. RBI has reduced CRR to 5%, Repo rate to 5% and Reverse-repo to 3.5%. Now the bigger question is; going forward will RBI further reduce rates?

To answer we need to look at the inflation number in a bit more detail. Inflation numbers mentioned above do not represent the true picture of price rise/ correction in the country due to following reasons;

We follow WPI and not CPI which is still high.
Primary articles which are 22% of the basket are still pretty high

These two reasons coupled with a depreciating rupee have put central bank in a precarious situation. While growth and WPI have certainly tapered off, high CPI and primary articles suggest that we may not see a reduction in the benchmark rates in the immediate future. Though I am sure that even CPI will come down in six to seven months time and this might lead to further interest rate cuts albeit six months down the line.

What should you do?

While GILT yields are still moving in the range of 6.5 to 7.2%, there are indications that liquidity is coming back in the system. Yields above 7% look unsustainable and should correct from there. This offers an opportunity for the investors.

The other opportunity is in corporate debt where the spread between AAA rated corporate bond and GILT is still in excess of 200 basis points as compared to a historic average of about 100 to 150 basis points.

Whereas in money market the overnight interest rates are below 3.5% and CLBO it is below 1%. With the expectations of liquidity further improving from here on there are no chances of this going up. That’s why do not remain attractive for investment.

Image via Wikipedia

Good time to invest in equity?

How bad things can get?

After hitting a low of 8167 on 9th march 09, SENSEX has jumped to 10,967 on 13 April 09. This is a return of 34% in a month, but this is the only good news I have heard in this time. Every other news related to economy does not look very encouraging. Starting from US where not many economists are sure that the stimulus will stimulate the economy or just be a drain on tax payer’s money. Now even car makers move closer to bankruptcy and asking for stimulus, no one knows which industry is going to be next.

Back home also things do not look pretty good. Fiscal deficit has gone up, current account balance has turned negative, and Tax mop up is less then expected numbers, which were already revised downwards. Exports have gone down by 33% and IIP numbers have shrank by .5%. The last quarter results did not offer any hope and this quarter is also not expected to be extraordinary.

Elections around the corner:

Market movement will also be determined by election results in India. It looks certain that we will have a coalition government and a few regional parties might support this new government from outside. A lot will depend on who is supporting the government, and what is the common minimum program of the parties. Like the current government if they also refrain from disinvestment and liberalization then we may see a negative impact on the market.

Glimmer of hope:

Inflation (WPI) is touching near zero level, which generally is not very good news for economy. But this time it looks a bit different. If one analyzes the numbers you realize that inflation may be zero and going down but the biggest reason for the same is correction in the commodity and crude prices, which will help the economy. as this will help reduce the input cost. For example construction cost for one sq. ft. has gone down from about 1200 Rs to 600-700 Rs. The same is true for all the industries using commodity as a row material. This will help reduce prices and increase margins. Only caveat for the investors is to move their portfolio from commodity producing companies to users of commodity like Auto.

Interest rates are correcting may correct further:

Interest rates have come down, central banks have reduces all the benchmark rates. This has led to a reduction in PLR of most of the banks, and changes are that it may further go down. This will reduce the cost of money, liquidity will be readily available. This will make most of the projects viable again and work will start on some of the projects which are stuck because lack of funds. Infect we have already started seeing some improvements on this front. Back to back price hike by cement companies is a good example of a robust demand for cement. This indicates a revival in construction and real estate companies as well. Auto numbers also indicate a robust domestic demand. Also RIL’s has commenced gas production from KG basin, which will save India almost $9 Billion per year. This should help fiscal deficit and reduce dependency of the international crude oil prices.

What should investors do?

All the points mentioned above will drive the SENSEX EPS numbers and smart money will start coming in. I would not suggest taking aggressive bets in the market right now, but fundamentals have started improving and I suggest a SIP would be a good approach to the market from here on. After all it’s not possible to predict the bottom of the market.