We are living in interesting times. Perhaps our generation will be the very few ones which would have seen such an unprecedented level of economic uncertainty with multiple economic indicators reflecting signs of caution as well as confusion at the same time. While this would sound very negative to most of the people around, a few would consider this as an opportunity to accumulate wealth for future.
You become rich by accumulating wealth. Wealth is accumulated by owning assets which are now priced higher than your buying price. How would that work ? It is no magic ! Though the current market price of the assets may not be in your hands, but buying the assets when they are at low prices is definitely in your hands. And as a corollary to that, assets are not available at cheaper prices when every thing is hunky-dory and economic indicators are all positives with economies charging at blistering pace. Quite opposite to it, assets will be available at throw away prices when every one wants to discard them or avoid buying them. This happens at times of economic stresses when the mood is bearish and people want to protect what ever they have to preserve the value of their assets. If you take this opportunity and buy appropriate assets, you create wealth in future !
The motive behind this article is to keep my readers appraised of the key economic events happening around us and how can we make the best out of it in order to create wealth for future.
This is the most hot topic which is hitting the press these days. Indian rupee has touched its life time high of Rs. 60 to a dollar at time of writing this article. This is not a good news at all. I would suggest you to read our article Rupee Depreciation – How Does it Affect YOU which gives sufficient details on the impact of currency deprecation on our daily life. In summary, for an economy like ours which imports more than it exports, every percentage point rupee depreciates increases the prices of products and commodities in India. Quite opposite, NRIs rake a fortune by remitting funds into India at high exchange rates.
Country Risk rating
India’s external credit rating has been hanging at BBB which is the last rating in Investment grade. Any rating below BBB becomes non-investment grade which has a direct impact on how much foreign investments are sent to India. Our article If India’s Credit Rating Gets Downgraded.. details more on India’s rating.
This is where we have been lucky. India’s inflation rate has been consistently dropping. For example, the Whole Sale Price Index (WPI) has dropped down from double digits from last year to around 5% in May 2013. This has a positive impact whereby it eases the pressure on the prices of commodities and products and hence gives RBI a head room to lower the interest rates. This further helps in lowering of borrowing costs resulting in increased production and consumer demand in the economy.
Interest rates are also on a downward trend in India though the impact is not materially visible to a common man whose loan installments have not reduced much. Banks have not passed on the interest rate cuts to the end consumer in an aggressive manner, but the cuts should be more evident in near future. The chart below shows how India’s base rate has moved from 2008 till date.
The only direction known to me for fuel prices is going north. They haven’t come down since the time I have gained importance of fuel in my life. Government has deregulated fuel prices to some extent in past couple of years, which means that the price which we pay will fluctuate based upon global fuel prices. While in past couple of months the global fuel prices have stabilised and have gone down, depreciating rupee has wiped off any opportunity to reduce fuel prices in India. Rather prices have further increased.
It is written all over the press. India’s GDP is no longer in the flashy 9% plus figures as observed during 2008-09. Infact the last numbers are below 5% in 2013!
However, if read on its own, the numbers and situation may look really horrible and hence it is very important to have some perspective. Look around at the performance of some of the preferred economies in the same duration (2008 versus 2013):
China – 12% to 7.7%
USA – 2.5% to 1.8%
UK – 4.6 % to 0.6%
Russia – 9% to 1.6%
Germany – 2.9% to ~ 0%
So if you look into overall context, you may realise that India has not done that bad. If you refer to my article on Globalisation, you would realise that India is no longer disconnected from global economics. And hence global growth rates, commodity prices, currency movements are having a toll on India’s growth rate. The question which you need to ask is – Would you be happy to invest in an economy which grows at 5% or which grows at less than 2% ? Atleast India is growing and when situations improve, it is better prepared to take advantage of the opportunities.
Reduction in Global Quantitative Easing
If you ask me which one economic indicator may have the worse impact on your investments, it is this ! Till date central banks across the world have been following an extremely loose monitory policy. In simple words they are giving money to banks at interest rates closer to zero. Banks are expected to use this facility and provide loans at cheaper rates to consumers to revive global demand for housing and consumer products. Banks are also using this facility to borrow money at a cheap rate from central banks and investing in assets which will give higher returns, e.g. Emerging markets bonds or equities. Now if the central banks pull out their plug of free money, banks may have to reduce their investment activities which in turn may result in banks selling their assets to repay the central banks. Though in this process the banks would have made a fortune, it may have an extremely adverse impact on the currencies of such markets as well as their bonds / equity markets. What we saw in June was a direct impact of this (On 20 June 2013, Sensex took a 500 point beating in a single day).
Investment Options Available
Having looked into the broad economic scenarios affecting India, lets look into what options you have to accumulate wealth. I always advocate that there are not many options available in the market to invest. They broadly gets classified into Land, Gold, Fixed Deposits, Equities and DO NOTHING – SIT ON CASH. Rest all products in the financial market are a combination of these asset classes.
- Gold & Cash offer no productive edge. Both of them are unproductive assets. Some investors may find it an opportunity to buy gold as it becomes cheaper in the market decline.
- Fixed Deposits may sound a good idea which assures a minimum return in current volatile market. But be rest assured that the minimum return is also the maximum return which you will enjoy – i.e. not exceeding 8-9%. It may be a good idea to have a percentage of your investments into FD type products, but if you are planning to have most of your money into FDs, you are severely limiting your financial future. FDs just maintain the real value of your money. And in a high inflation, they don’t even protect the real value of your money. Hence even after 10 years of investing into FD, the maturity value of your FD will have the same or lesser purchasing power then what it has today.
- Land – Perhaps the best asset class if you can afford it. However, considering that a unit of Land costs a fortune, if you buy too much land, you may be sitting with an illiquid investment in short term and tax inefficient. If you have a lot of money to invest, you can find good deals in real estate market and invest for long duration.
- Equities – this is the last option which you have. In long term generally equities and land should give similar returns. The problem which Equity faces is that its valuation is very transparent and hence if some one tries to value of your investments at Rs. 10 lac, you can immediately verify it by looking into your demat statement. You may be wondering that why is it a problem, infact it should be a big advantage. My interaction with investors says that if the investors know that their portfolio’s value is not in green, any rational for long term investment is not taken seriously. And hence instead of investing more into Equities in times of trouble, investors end up selling them.
I am personally taking this opportunity to invest more into the Equity markets and Equity Mutual Funds. I am avoiding Gold and Fixed Deposits for reasons mentioned above. A couple of years from now when this turmoil would settle, every one would start to buy Equities and at that time they won’t be available at throw away valuations as of today. But that’s about me. What is your investment strategy in the current times ?