The year gone by
The year 2011 has come to an end and we now embark upon a new year with tis own uncertainties and possibilities. So, what should investors expect going ahead? How should they tackel the unraveling economic downturn? What should be the playbook? Here, we attempt to address this and other peripheral issues.
To say that the past couple of years have been extremely difficult for Indian investors would be an understatement. The global economic situation continues to be fragile. According to RBI’s December 2011 Mid-Quarter Policy Review, the recent European Union Summit agreement did not really succeed in easing the negative market sentiment. And with no credible solution as yet to the immediate sovereign debt problem, risks of persistent financial turbulence as well as a recession in Europe remain high.
At the EU Summit, the European leaders agreed on a stronger coordination of economic policies to strengthen fiscal discipline. While this would be a welcome step for the medium- to long- term sustainability of the Euro area, the current short-term funding perssures still continue. While Q3 Euro-area growth came in at just 0.8%, growth in 2012 is expected to be even weaker. Also, crude oil prices remain elevated. A combination of these factors poses the highest degree of risk to emerging market economies, including India.
Consequently, India and other countries in Asia have witnessed currency depreciation as well as policy rate changes. The news on the domestic front, too, is not very good. Growth is definitely down. Significantly, the Index of Industrial Production (IIP) grew at -5.1% in October 2011. Moreover, GDP has de-grown to 6.9% in Q2FY12 versus 8.6% clocked last year, while inflation at 9.11% continues to be high, at least above the comfort level of the RBI.
To make matters worse, the rupee has fallen considerably. Since August 5,2011, the day when the US debt downgrade occurred, the rupee had depreciated by about 17% against the US dollar (as of December 15,2011). Given the scenario, the RBI has taken setps to attract inflows, including raising limits on investment in government and corproate debt, deregualting savings bank rates as well as NRI deposit rates, and increasing the ceiling on corporate borrowings abroad, among others. However, it remains to be seen whether these are effective in arresting the currency fall. Basically, the outlook going forward remains uncertain.
Lingering uncertainty
They say that when it rains, it pours. As we all know, much needs to be done on the policy and reforms front too. We need meaningful reforms and we need them fast. The bottlenecks as well as manipualtion in food supply are well known. For example, it is common knowledge that the producer/farmer gets only a fraction of the price which the end-consumer eventually pays, with the middle-men pocketing much of the difference. In other words, while we are paying through our noses for the daily food on our table, there have been regular reports of farmers committing suicides due to financial distress. Meanwhile, the supply chain is laughing all the way to the bank.
The irony is that huge quantities of food grains are rotting in government warehouses for lack of proper storage and distribution facilities. The loopholes in the PDS (public distribution system) are well documented. However, successive state and central governments have done precious little to address the issue. Organized retail would benefit the farmer as well as the consumer. Unfortunately, vote bank politics has taken precedence over reforms in a sector that is in dire need of improved infrastructure.
Mining is yet another ‘minefield’. For instance, in regard to our energy needs, we have the reserves, yet we import coal. If public sector miners are inefficient, there is no reason that coal mining should not be opened up to the private sector. However, it appears that politics and reforms do not go hand in hand with each other.
Ina nutshell, when an economy is faced with a situation of continuously rising interest rates, a self-imposed paralysis on reforms, and a falling currency (perhaps the only fator where the government is not entirely responsible), it is but natural that business confidence gets hit and investors, both domestic and foreign, start getting anxious.
Investment strategy going forward
So, amid all this negativity, one has to ask oneself- what are the positives?
Well, fortunately a lot. Although GDP growth rate has decelerated, India remains one of the fastest-growing economies in the world. Our demographic and domestic consumption-led demand is oru strength. At a timewhen the West is in the midst of nationalizing its banking system, our banks are well-capitalized, well-regulated, and most are already nationalized. Moreover, with a savings rate of 35%, India is as insulated as it can be against a global recession.
Therefore, if the RBI manages to control inflation, thereby maintaining at least the domestic purchasing power of the rupee, in an economy that has limited dependence on exports, then growth can be maintained o the back of domestic consumption itself. Moreover, things are not likely to get any worse. Most of the bad news is already discounted in the valuations. So, it would be a mistake to reject equity as an asset class altogether. However, this is precisely what’s happening. Most investors have run out of patience and others are being discouraged and alarmed by media-fed doomsday predictions.
This, in itself, is the crux of the issue. Sell on bugles and buy on cannons. Timing the market is impossible, time in the market is crucial. Buy when everyone else is fearful and sell when everyone else is greedy. These are pearls of wisdom given to us by investment gurus, such as Warren Buffett. But it looks like these teachings are best appreciated on paper- practical applciation of the same is best left to the next guy. Clearly, no matter how good your stock or mutual fund picks are, if you don’t play this investing game with gumption, reason and a measure of level-headedness, winning is almost impossible.
What to do is the simplest part; it’s what not to do that will separate the men from the boys. Stick with your systematic investments. Do not expect to make any money; in fact, in the near future, you may even be in the negative. But that’s what systematic investments are meant for. When (and not if!) the next bull run occurs, it is precisely these very SIPs that will hold you in good stead.
The current scenario reminds us of yet another quote from Warren Buffett – “Five years from now, ten years from now, we’ll look back on this period and we’ll see that you could have made some extraordinary (stock market) buys. That doesn’t mean it won’t get more extraordinary a week or a month from now. We have no idea what the stock market is going to do next month or six months from now. We do know that the economy, over a period of time, will do very well, and people who own a piece of it will do well. Just don’t borrow money to buy yoru piece.” Of course, Buffett’s quote is on the American economy but it can literally be copy-pasted to our situation.
Conclusion
Putting it differently, one of the most effective ways to achieve success in your investments is to stick with the basics and shut out all the noise. Markets will rise and fall based on national, international, political, geo-political, economic and financial events. The trick is not to get sucked into the micro aspects and instead focus on the macro picture. In other words, whether your investments are profitable or not is not up to the external factors but entirely up to you. The question is – are YOU up to it?
A.N. Shanbhag
Leading Tax Consultant
Disclaimer: The views expressed in this article are the personal views of the author. They do not necessarily reflect the views of the Karvy Group or the orgnisation that the author represents.
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