My six predictions for 2013

Before going into India specific predictions, let me share the big picture for  2013:

US will continue with its policy of quantitative easing – the US economy will do better than the current 2% GDP growth (expected to be around 3%) - there will also be mild austerity measures to balance the budget over long term (a small cut in expenditures and a mild increase in taxes for the rich) –the US economy and the US dollar will emerge stronger over the year.

Europe will continue in its difficult process of economic and political re-integration – the overall EU GDP is expected to grow between 0% and 0.5% –the  European central bank will continue with its policy of monetary easing – the German elections in 2013 will not result in change in direction – Greece, Spain  and Italy will continue to be in recession.

Asian economies and Latin American economies will increasingly become more prominent – China and India will do better in 2013 than in 2012. Middle East will continue its transformation and Sub Saharan Africa will grow further into prominence.

So here are my six predictions for India for 2013:

• Inflation will fall slightly and RBI will reduce interest rates in the first half of 2013 – this will result in rise in rise in Sensex between Jan and June 2013.  FII inflows would be good (at least till Q3 2013). In the last quarter of 2013, the govt will go into election mode and it would result in volatile and directionless markets towards the end of 2013.
• USD/INR ratio will go from current Rs 55 range to Rs 57 range by end 2103 – the devaluation will not be more than 5-6% through the year.
• Gold will give close to 10% returns in 2013 – it will beat inflation but will not be a great investment option.
• Long term Debt will give 11-12% returns
• Overall corporate performance would be better in 2013 due to more market friendly policies. Hence, it would be prudent to look at select stocks – it would be possible to get 25% returns by investing in quality stocks at the right price. Industries that I expect to outperform are FMCG, consumer durables and financial services.
• Improving economic conditions in India would result in real estate doing better in 2013 than in 2012 – so cities like Bangalore, Kolkata, Mumbai, Surat and Bhopal where real estate did not perform in 2012, will perform in 2013. Hyderabad real estate depends on the resolution of Telangana issue. I would urge caution for real estate investments in Chennai, NCR, Jaipur and Pune as the real estate market is over heated in these cities.

In all this, there is one joker in the pack – the Iran issue. This would become a flash point during this year and that can impact the global markets and it is difficult to predict the scenarios.

Beyond that, I am investing in 2013 based on these predictions.

Looking back at my crystal ball - How accurate were my 2012 predictions?

The time between Christmas and New Years is a good time to look back and plan forward. The weather here in Bangalore is beautiful – most of my friends have gone to Goa /Srilanka /Coorg /Chickmangalur etc and my students are all over the country (but available on FB)  -  and I am in a contemplative mood today.

So I went back to my blog dated 30^th December 2011 to see what I had predicted then – and this is what I found :

• I had said "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"  - Indian economy did slow down to 5-6% and Govt did falter (thanks to Pranab Mukherjee) and then Chidambaram has tried hard to talk the markets up in the last few months -so here I was right
• I had said "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)"  - That is exactly what has happened over the year
• I had said "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".  The US economy is closer to 2% than 1% - they have done better than my estimate – the US bond rates are still low – the Dollar is still very strong and the US /INR rate has gone beyond what I had originally thought.
• I had said "Chinese economy too will slow down in 2012 – and the challenge there would be growing their domestic consumption as currently 65% of Chinese GDP is export based". - That is exactly what has happened over the year

So based on these macro predictions, I had recommended the following on Dec 2011 :

Debt  - I had said "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" – In the past 12 months Gilt funds has given 10% -11% returns – RBI did not reduce the interest rates as predicted and hence the actual ROI was lower than prediction by 1%. Here my prediction was close

Equity - I had said  "for those who are ready to invest for three years, you will get a 20% plus return per year by investing in specific stocks" – The sensex has gone up by 21.7% over the year due to FII activity and so I was spot on in this area – my own stock portfolio has given me a 43.6% return in the past one year. I am happy to share that I have beaten the sensex by 22% in 2012.

What stocks do I have – well I have currently  Agro tech foods, Bajaj Atuo, BHEL, Colgate, Crisil, Dabur, Gruh finance, Havells, HDFC Bank, L&T, Maruti Suzuki, Noida Toll, Page Industries, Piramal Enterprises, Sriram transport finance, Swaraj Engines, TCS and TTK Prestige.

Gold - I had said "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" – Gold has given 10.1% ROI in 2012 – after a few good years when we got 20% plus appreciation in gold, this year gold just beat the inflation of 9-10% by giving an ROI of 10.1%.

Real estate - I had said "Investment in urban (not rural) areas is recommended – if you can buy a house or flat or urban land anywhere in– you will make 15-20% asset return per annum". Well this is a generic statement and cities like Chennai, Jaipur, NCR, Pune and Lucknow have gone up by 20% and there are cities like Hyderabad, Bangalore, Kolkata, Mumbai, Surat, Bhopal where real estate has not appreciated much – and one city Kochi where real estate has gone down in 2012.

 

So overall I am happy with my predictions made in Dec 2011. I think I was correct on most counts.

What are my predictions for 2013  -just wait for a few days – I will share it shortly.

Here is a true story

In April 2010, as I was leaving my corporate life, I toured my offices in Chennai, Hyderabad, Gurgaon and Noida for a farewell session with my colleagues. In each city, I also had a 2 hour session on wealth management to all those interested and quite a few employees came and met me one to one after these sessions for advice.

It is in one of these one to one meetings that I met this colleague (whose name I cannot reveal) – he had a total asset base of Rs 60 lacs (a house partially on loan and some cash at hand).He was fairly senior in our company – had a annual income of around Rs 25 lacs – had been working for more than 10 years – had clearly known how to earn a decent income – but had not learned how to invest his savings.

In those 10 minutes that we spent, I recall advising him to invest in real estate as Gurgaon real estate was really hot. We discussed the amount of loan that he should take and I shared my views about a good loan and a bad loan. I also shared with him why he should not look at stocks and Mutual funds and recommended to him an approach towards insurance. We also discussed the difference between investing in real estate in emerging locations and also the difference between pre launch offers and the post launch pricing of builders.

We obviously kept in touch on and off and last week he came home . He shared that his current assets is around 350 lacs and he has a housing loan of around 50 lacs – so his net worth has gone up from 60 lacs to 300 lacs in 30 months ( CAGR of 90%). His current salary has also gone up slightly. His investments are primarily in Real estate and he has now invested in 4 properties - most of which have appreciated very well – they are not yet yielding rental income – but once that happens - he will be financially free.

Let me share what he said to me  - in his words -

"2009 was deep recession and 2010 was when market started picking up. I took the risk of investing in couple of properties at a pre-launch price at that time, which gave me decent return. So, what I did right was:

 1. Identify the opportunity (Market had just started picking up)

2. Take some risk (I took the risk of investing in two properties). It has paid off.

Raja, no one knows the future. I listened to you couple of years back, got inspired by what you had done to manage your finances, understood your advice and took some courage to act on it. I never knew that it will pay me so much. Thanks a lot!"

The latest Fed announcement and how it affects us

Two days back, the US Fed reserve announced that it would keep interest rates low till the US unemployment rates come down to 6.5% (from the current 7.7%). Typically all central banks have two key policy goals – controlling inflation and keeping unemployment low. Linking their monetary policy so explicitly with a 6.5 % unemployment rate means that the “low global interest rate regime” is here to stay for some more time. This would mean that the there would be a constant supply of liquidity globally and this would be a continuing opportunity for emerging markets including India.

We can see the effects of this excess global liquidity here already. FII’s have pumped more than $ 20 Billion into the Indian markets since Jan 2012 – the second highest amount since 1993 (when India opened its doors to FII’s). Due to this, the sensex has gone up by 20% in the last 12 months.  Easy liquidity will also help India finance its external deficit at lower costs in 2013. It also means that Govt would find it easier to mop up money through privatisation of select PSU’s.

However, easy liquidity also carries the downside of increased commodity prices especially Crude oil and Gold (these are highest import items for India).

So these are the positives and negatives of the Fed decision with regards to us in India.

Will the India Stock markets go up in 2013?

Well you decide. I will share my views about Indian stock markets in 2013 in a post closer to New Year eve.

Should you buy Kingfisher airlines? –remember today is 12.12.2012

I know many of my readers, who invest in stock markets are trying to figure out the answer to this question.

Kingfisher stock had a high of around Rs 30.9 in Feb 2011 and since then it has been a downward journey – it touched Rs 8.40 in August 2012 and since then has been languishing around Rs 15. Now we have this news that Etihad airlines may take stake in the airlines. Both KF and Etihad have not commented on this news.  We also have the news that 5 of its 42 KF planes have been taken back by lenders.

Yesterday, after the news of Etihad broke out, 85 lacs KF shares have been traded in BSE and NSE. To get a feel of this number, the most actively traded share in BSE and NSE yesterday was SBI and 23 lac shares changed hands on this counter. The KF stock has gone up by 5% (it cannot go up more due to controls by the regulator).The current price is Rs 15.7 (as of 12.12.2012)

The stock’s book value is -66.83 as per money control – what it means is that in a normal transaction, the share holder must give you Rs 66.83 for buying the stock instead of you paying him Rs 15.7.

Now here is my take.

We all should have a core portfolio and a satellite portfolio. The core portfolio is for long term investments and the satellite portfolio is for short term opportunities. The split between core and satellite depends on your life stage (age) and your risk tolerance level. For someone like me, I have 90% core and 10% satellite. For my students, I would recommend 80% core and 20% satellite. If you lose the satellite amount – you should not lose your sleep. But if you lose your core amount – you should surely stop investing (and come to me).

So here is the opportunity for investing in KF with your satellite portfolio – I believe that the stock will go up for a few days – the final value will be a derivative of the valuation that Etihad and KF managements agree – but greed in the market will create opportunities for short term gains. Do not wait for exit at peak – you will not be able to judge it. Exit once you get a pre determined appreciation (may be 15%) .

Am I investing – No. But that is my personal decision.

 Should you invest – well decide for yourself. Remember today is 12.12.2012

The 4th and 5th session of wealth management –Investing through equities.

Let me start by wishing all my readers a Very Happy Diwali.

This blog was due for more than two weeks – but as the college had exams and then a 10 day break, this session on Investing through Equity was dealyed.

As we all know, different people have different views on investing through equities. And my guess is that everyone is sometimes right and sometimes wrong – there is no one right way to make money by investing in equities.   

Here, I share the methodology used by Warren Buffet –who I think has the most successful track record in this area.

With a view to share Warren Buffet’s approach to life and investing,  I showed the class a one hour documentary on the great man himself -  you too can see on YouTube. This documentary was  produced by BBC and is called “The biggest money maker, Warren Buffet”   (it is split into 6 parts in YouTube – each about 10 minutes long and here is the url of the first part https://www.youtube.com/watch?v=bk0Rgyv6BzU).   

The documentary tries to explain the reasons behind Buffet’s success –his early style of investing (called buying cigar butts) - his journey through the years and his views on life and on investing. As is evident in the video, he invests just the way he lives  –he is an independent thinker – has self awareness of “what works for him”  - and sticks to what works for him – he is long term in his approach – is willing to accept mistakes – sometimes break his own rules - is willing to take large risks once he is convinced about his approach  - is very honest in whatever he does - and, even though he is one of the richest men on earth, money is not important to him personally –he just “enjoys making money”.

After the documentary, we discussed his style of stock picking – the following are the key points that I would like to share:

• Warren identifies "well managed consumer monopolies" and waits for market price of its shares to come down to a level where investing in it makes sense. He avoids companies that are in commodity businesses.
• Once invested, he holds the investment for long term until the business loses its attractiveness or until a more attractive alternative investment becomes available.
• Warren believes that any equity investor should view the company in the same way as any business person buying up the whole company –focussing on its cash generating potential in the future – overtime the company that has a superior cash generating potential would give a good value appreciation of the stock.
• In this session, I describe 14 questions that one must ask before investing in any company. I also take the example of CRISIL to explain these questions – at the end of these 14 questions, we discuss two ways of forecasting the stock price  - and this would then give us the 10 year returns on this investment, if you invested in CRISIL at today's market price.
• These 14 questions are given in the ppt – most of them are self explanatory. The last two questions are mathematical and anyone who can read a financial statement can (hopefully) understand the flow of logic – our forecast of the share price of CRISIL ten years into the future is given in the end and we take the more conservative of the two forecasts and we take the decision to invest or not to invest.     

As more detailed treatise on this subject is coming out in my forthcoming book – where there is more than 40 pages on just this area (hopefully it is easy to read and understand :-) ).

You can down load my ppt used here -http://www.authorstream.com/Presentation/sgraja-1590883-session-equities-final/

What is next 12 month outlook – do we stay invested?

I have had quite some queries on the recent market conditions and what is my outlook.  So here are my views.

We all know that our government always knew what is required to be done – but they did not have the political courage to do it. The Congress is now in a do or die situation – if they do not act now, they will find it difficult to showcase their governance record in the 2014 Lok Sabha elections. And hence this recent burst of reformist measures – after all they too need a job after 2014.

The next 12 months, I expect the government to be keeping up this pro reform agenda –they will talk the markets up with one reform a week (something like –“an apple a day____).  India needs capital from abroad for growth and the world markets are flush with cheap liquidity. So the government in India will try its darn best to attract global capital to India.  And the opposition will try to stymie these efforts and that’s something we will need to live with – the Indian political theatre.

But overall the Indian markets should do well over the next 12-14 months.

But that is only half the story.

The remaining half is the global market outlook itself – here, the situation is not that rosy. The economies of US, EU and Japan are struggling to stay afloat –the central banks in these countries are giving large doses of liquidity (it is akin to keeping a patient alive on drips) – without these doses of liquidity, these economies would get into recessionary mode.  The stock markets, the real estate markets and the consumer sentiment in these countries is being propped up by the low interest rates ( cheap money) – this has been going on since 2008 and the economies are not doing any better  - but they are managing to stave off recession.  

Will the situation change in the next 1-2 years?

I do not think so.

These countries will continue to drip feed their economies by keeping interest rates low and infusing liquidity into the economies as and when required. Some of this money will trickle into Indian economy due to our “reformist government” and will keep our stock markets in good cheer.

 So till here everything looks fine – both the global markets and Indian markets will do well in the next 12-14 months even though the global markets are being propped up by low interest rates.

But there is one event next year that could be a game changer - the Iran problem.

With the conclusion of US Presidential elections, focus will be back on Iran. There will be pressure on Iran to give up its nuclear programme and I expect Iran not to surrender meekly. I expect increase in tensions and somewhere in Q2 2012, there could be some kind of flash point. Many scenarios are being talked about – about how it could unfold. It could happen through Iran mining of the Strait of Hormuz, or may happen through the current strife in Syria where Iran, Turkey and Israel get involved as the country dissolves into chaos, or it could be through Lebanon, where Iran could activate the Shiite militia to attack Northern Israel or it could happen pure and simple by Israel delivering a surprise attack on Iran’s nuclear installations.

 Whatever the scenario, there is a likely hood of a prolonged regional disturbance – it could result in oil prices going up, stock markets going volatile and one cannot predict to what extent the global economy will be impacted. This can present opportunities as well as threats and one needs to be careful.

So this is the situation - the India story looks good (12-14 months) – the global story, without Iran problem, looks OK - but the Iran issue is like the looming dark cloud in the horizon.

I would recommend that you stay invested in the Indian stock markets – surely till Q1 2013.

This is a period when gold and stocks will rise at the same time. Gold will rise in USD terms more as there is increase in liquidity globally – and depending on the short term fluctuation in the USD/INR rate, gold is expected to give inflation plus 3-5% at least in India ( i.e. about 13-15% ROI per annum).

Stocks surely could do better than that.

So my advice is to stay invested in stocks and gold and keep a close eye on the developments in Iran.