Who would have predicted the events of Q1 - As I sat and tried to predict the year ahead in early Jan 2011 – could I have predicted the blow out in Middle East? Could I have predicted the devastation caused in Japan? I am humbled by the fact that we can only predict so much – there are forces beyond us – however, it also means that we must constantly revisit our predictions and fine tune our strategy constantly. Also as a risk mitigation strategy, we must be prepared for the worst and have an action plan for the worst case scenario.
Having said that, when I see my predictions made for 2011 – I am not sure if I will change anything.
I truly did not predict the Indian stock market performance of Q1. I did expect a slowing down from the high PE levels of 2010 - but the markets went down faster than my estimates - it is now slowly inching up - but I do believe that this year we will not see much gains in Indian stock markets.
Inflation is a major threat to all developing economies, including India and we will see a subdued GDP growth of around 8% due to rising input costs. We have already had two rate hikes in Q1 and I am sure that the interest rates will keep going up as long as the inflation persists.
Further the US and European economies are not out of the woods yet – the US markets are being propped up by cheap money unleashed by Fed in the form of QE2 – Europe has it’s own problems in Portugal and Spain beside Ireland and Greece.
In these circumstances, I do believe that Gold and Silver are safe investments at this point of time and will give a return of around 15% this year.
Real estate in India is also going through a small correction due to the 2G and LIC HFL scams - the credit lines for real estate companies from the banks have almost dried up – further all the major real estate companies had announced many new projects last year and this drying up of credit has created cash flow problems for them – this would mean that the prices of projects may not rise as the companies would like to sell it and get cash flowing from customers – hence it is a good time to invest in real estate if you were planning for one in 2011 – look at premium projects and negotiate hard – there is a good chance you will get a reasonably good deal. In India, HNI’s have around 45-50% of their asset allocation in real estate and this is an area where I would recommend that we have at least 50% asset allocation. Last year Bangalore had witnessed around 15% appreciation in property prices and I believe that this year too we will see similar appreciation despite this credit crunch in India.
So as I write, I believe that real estate and Gold are the better avenues – each giving around 15% plus and beating the inflation by about 7-8% - Gold is more liquid but capital gains will be taxed – Real estate is less liquid and needs larger amounts. But as of now, I have moved most of my investments in these two areas.
In my next blog, I will share a real estate investment option where you can get about 20% returns per annum after having stayed invested for 3 years.