When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity. – John F. Kennedy
With that as the start I thought I must pen down some of my thoughts as we stand at the beginning of an interesting period in India. India can boast of a GDP that is pushing over 7%, a domestic demand that is ever surging thanks to a population that is young and hard working. Inflation is finally under control and thankfully the world crude prices have halved. For the first time we actually maybe looking at a situation of Current Account Surplus! Sounds like a term unheard of in my generation.
As an investor though, this is a precarious time, as an Indian investor even more so, traditionally the most loved options of Indian investors have been Fixed Deposits, Gold and Real Estate. They have always found them safe, secure and better return yielding. However, they are about to face a pretty peculiar situation in another 12-24 months time.
Lets look at the Repo Rate trend first :
Source : RBI
The rate trends here clearly show that the interest rates have peaked, I am sure almost everyone has heard or read a clamor for RBI guv to reduce rates to fuel growth. In my humble estimates we could possibly see another 100-150 bps reduction in the Repo rate in the next 18-24 months.
This will mean that the Indian Retail Investors favourite vehicle, the Fixed Deposit will have to be renewed at a significantly lower rate than today, although the real return of the FD is always about 200 bps above inflation, the Indian investor has never understood that. This means that after a year or so, FD will be a little less popular for the retail investor than it is today.
Next lets take a look at the Gold Chart, another favourite of Indian investors :
Source : Gold Price
We have all indulged, wow-ed when it touched 32000 per tola in India and are unable to fathom what is happening to gold in the last two years. With US Fed expected to raise rates in Sept or December, Gold seems destined to fall further.
This leaves the Indian investor with a peculiar situation, where he might find Gold cheap but three years of depression in the prices will play heavily on his mind, plus in the last few years Indian’s have actually bought a lot of Gold so probably they have a fair bit of investments in gold which is actually in a loss.
Third favourite for high earning Indian’s is real estate, its all fair to buy a home for yourself, or one home for renting out, but, when people go overboard, when black money makes the prices seem unreasonable or inexplicable by commerce, somewhere the pain is to be borne :
Source : Moneycontrol
The chart above clearly shows a trend, in another year or two thanks to low demand we might see further down rating of prices in real estate.
So this leaves the Indian investor with a hangover of 3-4 years where Real Estate prices have not gone up, Gold has come down and FD interest rates for his FD maturing in the next 6 months to 24 months will be at a far lower rate. He will be faced with some of his known people to have surely made money in the stock markets, as the last 3 years have been relatively good, particularly the period after elections to January 2015, which will make averages look nice.
Will like 2008, the Indian retail Investor come to the equity markets only when they have topped, are overbought and expensive? Will he again come and become a scapegoat or will he actually look a little further ahead and actually get ready for tomorrow. After all when we invest money we are planning for what we get tomorrow, however, we never take the pain to actually picture a few things and keep going the uninformed way.
At present the markets are witnessing volatility, China has just initiated a currency war this week, US Fed was expected to raise interest rates, however, currency war may prevent it, Parliament in India is not working and GST reforms are probably pushed back atleast by a year. Expect even more volatility in the next 4-5 months. Remember crude prices have more than halved, yet, petrol/diesel prices in India have gone down by about 20 odd percentage points, the Govt is raking in the moolah via taxes, India looks all set to actually have a Current Account Surplus by the end of this quarter.
Can the Indian investor actually bite the bullet today, when there is still value in the market, whilst it is not overbought or not extremely expensive? Or will he come when the time to buy would have gone, strangely, when the time will come to invest in FD, Gold or real estate, he will go for stock markets and when it is time to invest in stocks he is still finding fits in FD, Gold and real estate. The behaviour of the retail investor has always been weirdly foolish and always works on the memory of 3 years, as if it cannot remember what happened before those 3 years. Sometimes to have a vision it would be wise to look back at history, half the problem can be solved there and then, whether the retail investor will learn or become the sacrificial lamb again like in 2008 only time will tell.
However, as of now, brace for some volatility as the world adjusts to a new way of life, if you are smart, you will look a little ahead of the tide and spot the winners.
Like Warren Buffet said :
“After all, you only find out who is swimming naked when the tide goes out.”
Source: Letter to shareholders, 2001