Expert Zone

Lack of retirement planning options

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Unlike people in developed nations such as the U.S. and Europe, people in India are known for their conservative habit of saving. The need for regular income after retirement is a concern that haunts most Indians.

It goes without saying that banks and financial institutions should be designing products to tap this huge market. And yet the real situation is quite the opposite; there is a shortage of pension plans in India and those wanting to generate a retirement corpus have to depend on LIC.

We are also seeing young India investing heavily in home purchases. While this is very good from the asset build-up perspective, it should not come at the cost of the large corpus needed to provide liquidity on retirement.

The Annuity Game The steps needed for this are quite simple. Keep adding small amounts every month/year throughout the working period and build a corpus large enough to purchase an annuity on retirement. This would be the most structured way of handling it and is more advisable than ad hoc lumpsum accumulation which may or may not fructify.

So then, what are the structured options available to the customer:

EPF – It is the best, safest and forced form of accumulation. The emphasis on “forced” is what makes this a very good bet. The flipside being that a large number of self-employed and semi-organised sectors do not have access to this route.

2012 – Boom or Doom?

(The views expressed in this column are the author’s own and do not represent those of Reuters)

What a year 2011 has been. Except certain commodities such as gold and oil, every other asset class has been hit. With Sensex down more than 20 pct YTD, 10 year g-sec yields up by almost 1 pct and rupee down by almost 14 pct against the dollar, it has been a poor year for investors. This was caused by a bout of strong global risk aversion led by the European sovereign debt crisis, high inflation in emerging markets and consequent monetary tightening, and lack of proper policy action in India. The only salvation came from commodities such as oil (up almost 26 pct in rupee terms) and gold (up almost 38 pct in rupee terms).

Are any of these likely to continue haunting us in 2012? Or will there be a new set of problems? Is the worst already behind us? That’s the million dollar question on everybody’s mind. The irony is few of us, if at all, have the right answers. Still based on evidence available today, one can hazard a guess.

What does 2012 have in store for the investor? There is no doubt that growth has slowed down. The poor industrial growth numbers over the last quarter and the latest second quarter real GDP growth of 6.9 pct (manufacturing growth was a mere 2.7 pct whereas mining output contracted) drive the point home.

Is it going to change in a hurry? Seems improbable. After all, more than a year of continuous rate hikes should have taken its toll on growth. And to top it up, inflation is yet to subside at least on a year on year basis, even though that is not the best way to look at it. The fall in the rupee hasn’t helped either, exacerbating the already high trade deficit and inflation by making imports costlier.

But aren’t we pricing it all in? Aren’t equity valuations cheap and yields already near 2008 highs? True. But stocks can get cheaper still? Markets can remain irrational longer than you can remain solvent. Remember, we are still looking at Sensex valuations with respect to FY13 earnings which price in a 16-17 pct growth over FY12. Whereas FY12 earnings growth is already being revised down to 10 pct, expected FY13 growth can be downgraded further if macro indicators worsen. Also, the Sensex earnings yield (basis forward PE of 13-13.5 as per FY13 earnings estimate) at approx 7.5 pct is still short (approx 0.8 pct) of the one year bond yield. Historically, equity markets have come out of a bear phase once Sensex earnings yields have been higher than bond yields by more than approx 50 pct i.e. the ratio between Sensex forward earnings yield and bond yields has been around 1.5. On this basis, valuations seem to be in a fair zone rather than being screaming cheap. For Sensex yields to become 1.5 times of bond yields today either the Sensex will have to be de-rated further or the bond yields will have to come down significantly. It is unlikely that either of these events happen in isolation. Rather a combination of both, i.e. a price or time correction in stocks coupled with the bond yields coming off significantly seems to be a more plausible scenario going ahead.

The initial part of the year 2012 (probably the first half) thus might continue to see high volatility as a result of the above. But as we move to the latter half of 2012, things should start improving. Bond yields are most likely to have come down quite some distance by that time (assuming that inflation moderates — month on month growth momentum in core WPI inflation is already showing signs of slowing down — and RBI starts cutting rates) and equities should be available at a real bargain by then. The second half of 2012 should thus be much better than the first.

Indian stocks: Paradise for value investors

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The BSE Sensex romance with the 16,000 level seems to have been rekindled, with the Sensex closing below it on August 26, after a gap of more than 18 months during which it touched a high of 21,109 (missing the all-time high of 21,207 by a whisker).

As is the case, when a key sentimental support level is broken, most experts on business TV channels (a strong contrarian indicator) started giving short calls on the market the moment 16,000 was broken. Why is the level so important? What does it mean for the near-term outlook for markets? What should the investors do now? These are some of the questions that must be roiling the mind of every equity investor in India.

For starters, the Sensex closing at 15,848 on Friday is the lowest weekly close after nearly two years. This means investors who had invested in index funds made only 1.66 pct p.a. on an average in the last two years (as on Aug 26). Those in diversified equity funds fared somewhat better getting 5.4 pct p.a. in large cap funds, 9.9 pct p.a. in mid-cap funds and 9.2 pct p.a. in flexi cap funds.

Though positive, these returns are dismal as compared to what is normally expected from equities. In real (inflation adjusted) terms, equities have hardly yielded anything as WPI inflation (and I am not even talking about CPI inflation) has averaged around 9 pct p.a. over this period.

Compare this with 31 pct p.a. from gold, more than 6 pct p.a. from money market and short-term debt funds, 6.75 pct from medium-term debt funds and 6-7 pct from long-term debt funds and one can see that equities have underperformed the other asset classes significantly. Isn’t it then time for stocks to start catching up with their long-term averages (theory of mean reversion)? After all, haven’t stocks proven over time they are the best when it comes to beating inflation and creating long-term wealth? Is it then time equities start outperforming other asset classes?

While the answer to the above questions is in the affirmative, this does not mean that stocks will start rising from tomorrow, as headwinds from global and domestic fronts continue to remain strong. A confluence of global and domestic concerns had led to this sharp fall in the first place and they are yet far from over.

Where is the Indian stock market heading?

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The BSE Sensex has left us guessing about where it is headed. It’s not an easy task considering it had touched 20,509 in Jan 2010 and peaked at 21,207 in Jan 2008.

I wonder what will eventually trigger the directional move everyone seems to be waiting for. Will it be fears of heightened inflation resulting from an expected hike in diesel and cooking gas prices, a global event in the euro zone or some change in the U.S. economic scenario?

I am not sure that lending more money to defaulting nations will resolve the euro debt challenge just as the quantitative easing has not yet addressed U.S. economic concerns.

Oil prices which depend on the balance of power between OPEC and the opposing Iran and Venezuela will continue to be volatile especially with the ‘Jasmine revolution’ showing no signs of abating.

The Chinese economy with its investment-oriented growth agenda will continue to consume even as its economy cools down and according to the Food & Agricultural Organization, food commodities may continue to hold firm due to supply shortages mainly as a result of natural calamities.

All this combined with a possible increase in diesel and cooking gas prices — inflation in India will continue to exert upward price pressures even as inflation continues stubbornly in the 9 pct zone, motivating further increases in policy interest rates by the Reserve Bank of India.

Watch out for early signs of peaking inflation and slowing growth

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Indian equities, after recovering smartly during much of 2009 and 2010, have again started exhibiting high volatility over the last six months. At a global level, this time it is emerging markets which are leading the downside in equities. Even among emerging markets, Indian stocks have looked weaker.

Macroeconomic headwinds in the form of high inflation, fiscal imprudence, corruption and lack of investment growth threaten to dent the premium that Indian markets enjoy over their emerging market peers.

Here’s a look at the various factors that can affect equities in the near future:

Global factors

With none of the headwinds that led to the global financial crisis in 2008 being addressed properly, problems that led to the biggest recession in the last eight decades are not yet behind us. The recovery in equity markets seen in 2009 and 2010 was more due to the flow of cheap money across the globe as a part of the RISK-ON trade. However, there are several issues today that we believe can be the RISK-OFF trade surfacing back, and this will not be good for risky asset classes such as equities and commodities. The following are some of the factors -

High inflation and rising interest rates in emerging markets An ultra-loose monetary policy in developed markets coupled with weakening currencies, particularly in the U.S., Europe and Japan, growing demand from rapidly industrialising nations such as India, China and Brazil coupled with production disruptions across the world have led to a sharp rise in commodity prices and hence inflation.

Five things to do before you turn 30 — financially

(The views expressed in this column are the author’s own and do not represent those of Reuters) 1) Start investing in Mutual Funds There is a reason why I mention this as the first point in the article. Mutual funds are by far the best starting tool for any investor. And this holds true for any type of investor — extremely aggressive ones and those who do not know much about investments.

The tough part of managing the portfolio is best left to the experienced funds managers who have adequate resources and the knowledge to best maintain the returns on their funds portfolio and manage the associate risks. They are far better informed than an individual can expect to be in most cases.

HOW TO DO IT?

Always go the SIP way, at least initially. Well, as the name (Systematic Investment Plan) suggests, you systematically invest a certain amount every month, irrespective of the market conditions. Choose one or two large-cap funds with a proven track record and then just stick to it. You can base your choice of funds on recommendations from websites like mutualfundsindia.com or taking help from your financial planners.

The amount invested every month can be as low as 500 rupees or maybe even 5 percent of your monthly salary to start with. You can start with small amounts and then gradually increase it when you get comfortable. You should have a minimum five-year horizon, the longer the better.

WHAT NOT TO DO?

Do not evaluate the portfolio every month or with every dip or rise in the stock market. Once decided on the funds (take your time in doing this), leave it for at least a year. You may want to review the performance of your funds once every year and compare it with peers to check the relative performance and then maybe make a shift, if needed.

The golden bubble?

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The spot price of gold crossed $1500/oz on April 22 and confirmed the belief that gold and, even more so, silver, are the best investments. In the last one year, gold gave a return of more than 30 percent; equity (Sensex) a mere 10 percent.

That was not always so. For more than 28 years before 2008, gold was a dead investment. The price of gold which peaked at $850 in 1980 dropped continuously to recover only in the last decade to cross the earlier peak in January 2008. What is surprising, gold was not even a hedge against inflation. Had gold prices increased at the same rate as CPI, gold today would have cost $2200/oz.

Gold has no intrinsic value except for some industrial uses. Hence gold accumulates as stock. New mining of gold is small and expensive. Of silver it is negligible. As such, prices of these metals depend entirely on demand.

Nearly a half of the world stock of gold stock is in jewellery, mainly in India and China; the other half is investment, mainly by the central banks and occasionally by private sector. The central banks no longer trade in gold. But to private investors, gold is one of the assets in their portfolio and therefore subject to swings.

Being one component of the asset portfolio, investment in gold depends on the return from investment in other assets. Gold is an anchor private investors hold on to when prospects for the rest of the assets appear dim. After 28 years, gold came to life because the world economy got into a crisis. Gold was once again in demand and gold prices shot up.

There are a variety of assets people choose to invest in. The two main assets are commodities and securities. The most competitive asset against gold is equity.

U.S. vs China: which economy is bigger, better?

(The views expressed in this column are the author’s own and do not represent those of Reuters)

One of the most surprising developments resulting from the financial crisis is the belief among ordinary Americans that China has become the world’s leading economy. This view appeared in the roughest times of 2009 and has persisted even though the impact of the crisis has begun to ebb. U.S. media have frequently conveyed the same belief. But it is patently absurd.

The principal reason for Americans’ dismay is jobs: Official U.S. unemployment breached 9 percent during the past two years. It is even higher when counting those who have stopped looking for jobs, yet would work if they could. In contrast, Beijing issues an urban unemployment figure below 4.5 percent, but this includes only those officially recognised and no one, including officials at the Ministry of Human Resources and Social Security, believes it is accurate.

The state-controlled Chinese Academy of Social Sciences placed urban unemployment at 9.4 percent before the full impact of the financial crisis was felt. The PRC’s rural unemployment has long exceeded 20 percent. True Chinese unemployment is certainly higher than true American unemployment, and, depending on how unemployment is measured, could be much higher.

The contest in income, meanwhile, is utterly unequal. American Gross Domestic Product (GDP) in 2009 was nearly $15 trillion, while China’s was $5 trillion, despite a population more than four times as large. The average American had $48,000 in 2009 income, the average Chinese had less than $4,000. Both of these gaps narrowed in 2010, as they have almost every year in the past 30, but they remained huge.

It is true that many consumer goods are cheaper in China, some much cheaper. Economists try to formalise different prices in different countries by checking the purchasing power of the same amount of money. The idea is that the same amount of money should buy the same good or service everywhere. When it does not, because one country has far lower prices than another, for instance, it can be useful to compare incomes using differences in prices. The difference in prices is called purchasing power parity (PPP). PPP recognises that earning $50,000 a year in London is very different from earning $50,000 a year in Luanda, Angola. But PPP is often not very accurate.

Lower profits, uneasy market

(The views expressed in this column are the author’s own and do not represent those of Reuters)

On April 11, the CSO announced a further dip in industrial growth to 3.6 percent, bringing the Sensex down 189 points. That index was for February, the expectation about March is no better — which leaves the market a little cold.

The reasons for the dip are not all dismal. Possibly, the dip is mostly caused by what is generally called the base effect. Last year in February, growth had climbed to an unsustainable 15 percent. Even a good increase in production would have brought down y-o-y growth. The market is not unaware of this statistical illusion though a higher growth would have given greater comfort.

What is of concern is inflation. It pushed up cost more than price, putting pressure on margins.  First, prices of industrial raw material (including agricultural raw materials, metals and petroleum products) were up in the Jan-March quarter by more than 20 percent y-o-y. These cost increases could not be wholly passed on. Surely, prices of manufacturers also increased. But that was less than the cost. Second, the sharp increase in interest payments which were about 15 percent of operating profits sliced off net profit.

What is surprising, industrial growth dipped in spite of the steep rise in exports. In February, exports were up 49 percent with import growth lagging behind at 21 percent. On average, industry exports more than 11 percent of production which should have stimulated industrial growth.

Not all corporates have been equally hit by cost inflation and interest rate. The impact has been more in manufacturing and mining than in services; and in manufacturing more in capital goods than FMCG. Capital goods production was actually down more than 18 percent.

Production was drastically cut because investment must have been on hold possibly in response to the increase in interest rate.

What to expect from earnings season?

(The views expressed in this column are the author’s own and do not represent those of either Principal Pnb or Reuters)

The markets seem to be meandering in search of a push to move on in some direction.

In the Indian context, most concerns seem to have been brushed under the carpet by the flood of FII inflows which seem to hold up the market at its current levels.

Considering the FY11 trend of outflows seems to have been stemmed, the situation could continue till the U.S. recovery takes root and excess liquidity is pulled out.

The impact of the recent Portugal SOS will unravel over the next few weeks.

Inflation more than anything else seems to be getting us intertwined with global issues.

Japan’s rebuilding effort should impact the demand for commodities, energy sources fuelling inflation. The Middle East political scenario and the oil price hikes will continue to provide our economists with edge-of-your-seat thrills.