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.