Friday, December 30, 2011

My 2011 predictions revisited and where to invest in 2012

In retrospect 2011 was a tough year to predict – in Jan 2011, we were still talking of “green shoots” – now that’s a forgotten phrase. As of Jan 2011, the Europe crisis was in Portugal, Ireland, Greece and Spain – and it was largely under control. No one could have predicted the natural disasters in Japan and Thailand and no one, absolutely no one, could have foreseen the what happened in Tunisia, Egypt and Libya. The Anna Hazare phenomenon in India, the Occupy wall street protests in US, anti Putin protests in Moscow, anti economic policy protests Israel, Spain and London are all pointing to a global restlessness amongst the youth – there is an anger against governments and most governments are today less popular than they were in Jan 2011. All these were not foreseen 12 months back.

Having said that, my 2011 predictions were fairly correct –

  • I had predicted a GDP growth slowing down – that happened.
  • My prediction on rising interest rates through 2011 was fairly bang on target.
  • I had wrongly predicted the markets to give positive returns – in reality, the Indian equity markets have given a minus 25% returns in 2011– so here I was wrong (as an excuse, I must say that almost every equity analyst from Citigroup to Credit Suisse to Morgan Stanley had predicted that equities would do reasonably well on 2011).
  • I had predicted Gold to do well and I had recommended it all through the year – here I was correct – 2011 was, in fact, a “Golden year” – Gold gave a 30% return over the year.
  • Real estate was another area where I had predicted that there will be not too much returns in 2011 -  but I had recommended it with a three year time frame- actual numbers are difficult to get – but NHB does a survey that you can see at - the data here needs to be studied on the basis on the last four columns and you can see that there has been good appreciation (above 10%) in residential real estate prices in  Faridabad, Chennai, Pune, Bhopal, Mumbai & Delhi  and there has been low appreciation (below 10%) in residential real estate prices in Hyderabad, Patna, Ahmedabad, Jaipur, Lucknow, Surat, Kochi, Kolkata & Bangalore. So I believe here too I was fairly correct in my predictions.

So what will be the key themes for investing in 2012 for us in India?

I believe 2012 will be a tough year – the big picture is as follows:

  • Indian economy will slow down a bit –reforms are the way out and our government will need to push through a few reforms if we need to be anywhere near an 8% growth
  • Europe problems are expected  to dampen the markets for the first few months –I am optimistic that it will not result in a Lehman like crash – the Europeans will find a way out (even though a few countries like Greece and Italy will be bruised badly)
  • The US economy will limp through a 1-2% growth in 2o12 (just like in 2011) – but in the absence of other alternatives, the US markets will be deemed as the safest place to be and US Dollar will be strong and the US Bond rates will be low
  • Chinese economy too will slow down in 2012 ( it already has) –  and the challenge there would be growing their domestic consumption as currently 65% of Chinese GDP is export based.  
  • And then are there are elections in US, France, Russia and a party leadership change in China in 2012 -so these will impact the government actions in the coming year.

So where do we invest?

If your investment is for one year timeframe –I am afraid, you do not have too many options – but if you are looking at three years and above, 2012 will offer you lots of opportunities - in fact there are great opportunities available right now.

The four big options that anyone has are – Investment in Debt, Equity, Commodities and Real estate.

Debt based investments in 2012 will be popular –low risk and inability to understand equity markets will drive people towards debt markets – Interest rates in India will go down gradually – starting Q2, I expect RBI to slowly reduce the interest rates – so you will find long term debt based funds which have debt issued in 2011 (when the rates were high) giving higher returns in 2012 as the interest rates go down. So here is the first opportunity for anyone who has a one or two year investment timeframe – invest now in Long term debt funds which have portfolio of 2011 debt –you can expect about 12% returns on these  – you can see some of the details of these funds at - as you can see, they have not been giving good returns till now as the interest rates have been going up – now I expect them to give better returns as the interest rates start to go down in 2012.

Equities will present long term opportunities in Q1 and Q2 of 2012– In fact even now, there are many equities that are priced attractively in the market – I have been investing in equities selectively since Q4 2011 and I recommend the same to anyone who has a 3 year plus time frame –as we all know, the value of a stock globally is determined by it’s earnings growth ( EPS growth) – but the price of the stock in India depends on the mood of FII’s  - right now the FII’s are net sellers in Indian markets and hence there are stocks that are good long term buys that are going cheap. I have listed out a few stocks in my blog in October and I will list out a few more stocks in my next note in Jan – but needless to say, these are opportunities with a three year time frame – so for those who are ready to invest for three years, you will get a 20% plus return per year by investing in these stocks.

When it comes to commodities – I do not track anything except Gold–so even though Indian markets for other commodities ( like grains) did perform well in 2011, I cannot comment on them. I believe Gold will not give more than 15% returns in 2012 in Indian rupees – It will beat Inflation in India – so it not unsafe – but there are better investment options in 2012 – so if you are investing now, Gold is not the place to invest –but if you have invested in Gold in 2011 or before – you can chose to rebalance your portfolio or chose to stay in Gold – you will not lose money.

Real estate will start showing signs of appreciation – but remember that  real estate is for those who have an investment time frame for 3 years plus– Investment in urban (not rural) areas is recommended – if you can buy a house or flat or urban land anywhere in India ( with a caveat that the location has to be an upcoming location and it has to be a legally clean asset) – you will make 15-20% asset return per annum. Real estate in fact is the safest bet as of now – as it is much easier to identify a good real estate opportunity than to identify a good equity opportunity and India’s urbanization story is still going strong even though the India growth story has dipped a bit.

So for 2012, I recommend

  • for short term investors – Debt funds and
  • for long term investors – Select equity and Urban real estate.

Saturday, December 10, 2011

How to save tax (under section 80C)

This particular blog is for students who passed out of college in 2011 and are working for the first time – here, I would like to share the various tax saving options that you have and my recommendations as to how you can minimize your tax outflow.

You can invest up to Rs 1 lac and save on taxes under section 80C of the Income tax act. The amount invested under section 80c is directly deductible from your gross annual income for tax calculation purposes – what this means is that if your gross annual income is Rs 5 lacs and you invest Rs 1 lac under section 80c, your taxable salary goes down to Rs 4 lacs (on which you will need to pay the tax).

Now what are the various avenues for investment under section 80c?

The first avenue is Provident fund (PF). You already would be investing in PF through statutory deductions from your salary – your contribution to PF is tax deductible section 80c. Beyond this statutory PF deduction, you can also invest additional amounts in PF through voluntary PF (VPF) by instructing your payroll team to deduct additional amounts every month - this too is tax deductible under section 80c.  Currently PF investment gives you a return of  8.5% per annum. As you may know, PF accumulates throughout the working life and you get a lump sum once you retire. As you move from one company to another company, you move your PF money as well.

The second option that you have is the Public Provident fund (PPF) –for this you will need to open a PPF account in a bank (most banks offer PPF facility) – PPF currently gives you returns of 8.6% and this is tax free- the minimum you need to put is Rs 500 and the maximum amount you can invest is Rs 70,000 per annum. The PPF account has a term of 15 years and you need to invest for 15 years before you can close it and take the money out (there are ways to take money as loan before).

The third option that you have is Life insurance premiums and ULIP’s.  You can go through not just LIC - but any private insurer for this. I have always recommended that the only Life insurance that you must take is pure term insurance – any other life insurance policy (like endowments, ULIP’s, annuity /pension plans etc) are sub optimal investments with returns of around 6-7% over a long period.  I believe that insurance is mis-sold as an investment / tax saving avenue in India and we must only look at insurance as a risk mitigation tool. So insurance is not recommended for tax saving .

The fourth option that you have is Equity linked savings schemes ( ELSS) offered by mutual fund companies – these schemes have a lock in of three years. Data in tells me that the top ELSS schemes in India as per Crisil rating are Franklin India tax shield, Religare tax plan and Fidelity tax advantage – these schemes have given a return of appx minus 10% to -14% for one year, +4 to 5% annualized returns for two years and +25 to 27% annualized returns for three years. As equity investments are to be looked at for 3 years and above, these schemes have given good returns in that time frame. But as we all know, good past performance does not ensure good future performance.

The fifth option is five year bank or post office deposits – these are also covered under section 80c. The returns here are 7.5% to 8%.
Then there are rural electrification bonds and infrastructure bonds where you have a 3-5 year lock in –the interest earned in these schemes is appx 5-6% ( post tax).
There are other ways of investing under section 80c, that may not make sense to my students – for example, if you have a housing loan, then you can repay the principle and that would be deductible from taxable income under section 80c. Also, payment of tuition fees for upto two children in any Indian school, college or University would be deductible from taxable income under section 80c.

Having seen the most common options available,  for someone below 30 years of age and earning about 4-10 lacs  – I would recommend ELSS schemes or PPF beyond the PF that you are already investing.

The last issue that I want to address is the timing of these investments – we are now in December and we are deciding on these investments for the year 2011-12. This timing is sub optimal. We all know that the earlier we invest, the earlier the returns start accumulating and hence, I would recommend that for next year ( 2012-13) - you decide and invest as early as possible –  in April or May - or surely by June.

Friday, December 2, 2011

Investing in uncertain times

What does the future look like right now? Where do we invest? Where are the markets heading?
In Europe, US and in China, the governments are dithering from taking hard decisions – though for different reasons. These three regions combined represent 50% of the global GDP – and there are risks that Europe will simply implode or the US will sink back into a recession or China will have a hard landing. Decision makers in these countries have delayed the disaster so far by kicking the can down the road – but lately the can is getting bigger and heavier and the kicks are getting feebler – the risks of one of these regions stumbling is increasing by the day.

Europe has the biggest and most urgent problems. By getting new governments in Greece and Italy last month, the EU had once again kicked the can and delayed the D-day by a few weeks – but these were first baby steps towards solving problems that have been created over 2/3 decades of profligate spending -these are right steps but these are not the solutions to the problems they face. You cannot have the rich and the indebted EU nations under the same umbrella without the rich funding the indebted - It is like two brothers, one much richer than the other, staying in the same house - but being financially independent of each other- eventually the arrangement will unravel. In the last few days things have reached such a stage that you can’t kick the can any further. There are two scenarios possible –
  • the Germans will change their minds and let the ECB print Euros at will and to underwrite sovereign debt; or
  • the Eurozone will breakup
Till recently, I did not believe that the Eurozone will break up– but now I see that the scenario of Euro zone breaking up cannot be wished away - If that happens, how the markets will react cannot be judged –normally in such panic, equities could fall to levels like in 2008.

In US there are problems of slow growth and high fiscal deficit – the stimulus provided since 2008 in the form of bailing out of large financial institutions, keeping the interest rates low and the two rounds of quantitative easing have not revived the US economy. The US economy depends on consumer spending (70% of it’s GDP is consumer spending) and with high unemployment and households burdened with debt, the consumer spending is not expected to revive any time soon. As there is US presidential elections next year – one cannot expect any substantial economic measures till 2013 and hence the situation of uncertainty and slow growth will continue in the US at least till 2013.

China is a state managed capitalistic economy - of the 42 top Chinese companies in Forbes 500, 39 are state owned companies. It’s growth is dependent on keeping it’s exchange rate low and continue exporting to US, EU and Japan ( 2/3rdof their GDP is exports). The challenge there is to grow the domestic consumption. Increased government spending since 2008 in infrastructure has helped China pull itself out of slowdown till now – also they have enough cash and foreign reserves to postpone any crisis –however years of unbridled high growth seems to be catching up and there are signs of slowing down, higher inflation and financial stress in the system. Slowing down in china surely will have an effect globally, including India.

So the question that each one of us must answer is what should we do? I believe that equities will continue to be volatile for some more time – based on your own needs and ability to take risks, and the belief that India will be (compared to US and EU) a growth economy in the next decade
  • If you are investing for 0-1 year - look at liquid funds - these give post tax returns of 7-8% and the liquid funds are almost as good as a savings bank account when it comes to liquidity - you can encash in 24 hours.
  • If you are investing for 1-3 years- look at FMP's -these are better than FD's and will give you post tax returns of about 9%
  • If you are investing for the long term (3 years and above) -look at fundamentally good stocks at the right prices is what you must aim for - I have suggested a few in my last blog - I will suggest a few more mid of December; and
  • If you are investing for 5 years and above - look at urban real estate – every city in India has good locations/ properties where you will get good returns - the long term phenomenon of urbanisation will continue and urban real estate will go up in value –however as we all know, you need to have larger amounts for real estate and the investments are low on liquidity.