INVESTING IN TURBULENT TIMES

We are in a debate with my old friends on one of these days. Realized that many people are into Secondary Market and have been cheering the late surge of the Sensex or Nifty. Sensex is influenced by Indian Cricket Team- always winning! When have we seen the last major correction- which went on for months? Even the short correction in the secondary market after COVID did cover back soon- too soon? 

Clearly, yearly Sensex growth is steady, ensuring steady secondary market and mutual fund return- which shows a well working Indian economy. We’re happy middle Class.

However, how are the fundamentals? Like Income, Jobs, Investment? Will the equity market lead to an increase in sustainable wealth for the next 5 to 10 years?.

On the Income side, last year has been a big challenge. We have seen how COVID has wrecked our life, Income and Finances. For many, spending nature has changed – irreversibly. The variability across sectors is skewed. Like, war, many sectors have adapted and changed and seen as champions- but many sectors just could not- travel, hospitality, Small and Medium Scale Businesses, etc.

Before COVID, the Indian economy was also going through a structural transformation - the short-term pain with hope for longer-term gain. Is the pain of the transformation over?

We wanted to see what the GDP growth just preceding Stock market data was last 3 years. We looked at Q3 GDP data of India.

IMF estimated that the world economy will contract by 4.4% in 2020. The last time the world economy contracted was in 2009 (-0.1%).

 Data clearly tells a story. That the Indian Secondary market is on a balloon and without a base! The market will surely have a correction. Then how about the middle-class wealth? Those savings. Many people are still without a job- the only hope is their saving in mutual funds or at the secondary market.

One may argue that the reforms will bring in good days- which will further propel the secondary market. We learned is to look for Gross Fixed Capital Formation. In Layman’s term, it is the sum of all resident’s investments in Fixed Asset minus the disposals.

The GFCF has not grown in the last few years. It is true that many economists have predicted over 8% growth in GFCF in India in the next two years. The reforms and budgets and our improvement in Ease of Doing business will contribute. Will we achieve over 8% year on year growth in investment?

However, our thinking was even an 8% robust increase in GFCF still makes us vulnerable due to adverse global financial volatility- especially if there is less liquidity- going forward in Europe and the US- thereby creating capital flight from global institutional investors.  

Are investments being made today? Are things changing today? One of the ways to feel this change is if we see jobs improving. All around us- Still way to go.

So, what about investor funds? How to protect our income and future? We felt that one needs to understand the risk and their situation and analyze their investment carefully. A disproportionate allocation in equity or mutual fund may not be the best strategy. What do you feel? Time to diversify?

But where?  

• Real Estate: One of the ways, people used to save was in Real Estate. Once we used to feel- the Indian middle class and the appetite for the house is never-ending and capital appreciation used to be the highest.

RBI releases House Price Index [HPI]. This is aggregated data across 10 cities. All India HPI Index is at 1.1 % in 2nd Qtr., while in 1st Qtr. it was 3.3%. City to City there is an appreciable variability, with Ahmadabad having 9.0 % growth while there is a contraction of (-5.5%) in Delhi. Many cities like Delhi, Bengaluru, Chennai, Kolkata recorded a sequential decline. Mumbai remained in the previous level.

The government has brought in reform in this sector. Affordable housing is growing. The tax incentives are there. Yet we felt, there is no indication that things are changing in HPI.

• Fixed Deposit: Many Indians, after retirement, are depending on Pensions, Money-Back Policies with their hard-earned savings are partly secured in Banks, a post office in Fixed Deposits. The bank’s interest rates are decided by the RBI’s Prime Lending Rate [PLR]. We were looking at the yearly RBI PLR data.

Clearly Interest The rate is on the decline. Considering the fact, that India’s Interest Rate is many ways much higher than the Developed world Interest rate, we feel, it is headed for further south. What is more important than the inflation in India has come down, but still higher than global inflation. Hence the real rate of interest in India on Fixed Deposit is hardly anything. Plus, interest on fixed deposit is taxable.

Only NPS & PPF are giving a good return till now. Can it be a good option to invest beyond what is needed in 80C, what do you feel?

• Investing In Gold/ Precious Metals:- India is the Top consumer of Gold ahead of China, the US, UAE. In Q4, 2019 India consumed 136 MT of Gold, ahead of China 132 MT  and quite ahead of US 35 MT & UAE at 1.5 MT. While Gold prices are cyclical and inverse to the economic wellbeing of the Globe. Is there any opportunity in Gold? There are many structural changes happening with regulation, Is the pricing way too high?

• Insurance: - This is one sector that holds a lot of promise. The fact that the average penetration in the Indian market is 3.7% in FY 19- there is a lot of headroom for growth. The market is growing at 14% YOY.

Many in the sector are offering modest saving and income protection plan for 10 + years with yield beyond PLR along with liquidly and risk protection. . Also, another factor adds fizz into the sector is under 10 (10D), the income proceeds of Life Insurance is free of any Income Tax. The government has brought in reform including the recent budget announcement of allowing 74% foreign ownership & privatization of LIC.  

What do you feel?

The question before us all is when to exit from the equity market and how much. The entire approach depends on one’s ability to take risks. But today’s corporate, success takes time and effort. Where is time then to detail on investment plans and ensure a good future? Can we afford to give us that time? Are we relying too much on investment bankers?