WHERE TO INVEST ?

Where to invest ? So many Indians and NRIs are now a days asking this question , specially after Real estate market is not appreciating at a pace which used to be .

I am a great believer of Asset allocation . One should not be  putting his all eggs in one basket  . Key is to divide your wealth according to your risk appetite , your liquidity requirements and current market scenario. There are 2 ways of asset allocation . One is passive asset allocation in which a investor doesn't understand economic cycles or does not want to take market risk. In passive asset allocation irrespective of economic condition you don't change your asset allocation where else in active asset allocation you tend to change your asset allocation depending on market conditions.

Options available in India where we can invest and diversify are Real estate, gold , Fixed income products ( DEBT funds), Domestic equity market , Offshore equity market , Private equity holdings .I will share my current view on each asset class and one can allocate there assets dynamically depending on current market conditions.


Real Estate :

Indians are crazy about real estate . People have created a huge wealth in real estate due to its illiquid nature, black money involved ,no transparency . Real estate in past have fetched around 16 to 20 percent returns if we consider it from 1980s( Not considering land as it involves very high risk). Despite all economic cycles the asset class is considered to be an appreciating asset class. However timings at which you are investing will decide the returns on assets. For eg . My partner has bought flat at pune in 1990 . He bought it at a price of 900 rs per sqft . Within couple of years price shoot up  to 2400 rs per sq ft . Then came a Japanese crash in 1993 and prices again went down to 1100. Current market price of that flat is 10000 per sq feet . If you will calculate what IRR my partner has earned is 20 percent year on year . If any one had invested @ 2400 in 1992 the IRR comes down to 13 percent year on year . So timings does matter a lot while buying any property for investments. Currently real estate prices are very high and we have seen its bull run . My view is real estate market may either will go down for couple of years or you will find the same price after 2 to 3 years ( Time correction).


Gold :

Gold is considered as hedge against inflation in all developed countries . Inflation in developed countries is not more than 2 to 3 percent . So in dollar terms gold is going to grow @ 2 to 3 percent yoy. In INR terms one can fetch 8 to 9 percent returns in gold considering rupee depreciate avg 5 to 6  percent every year since 1930. How ever gold will deliver good returns when developed nations like  US ,UK, Japan are struggling . Considering all good and bad years gold since 1935 has not beaten  inflation in India . Gold has delivered almost 8 percent yoy since 1935.  however if you feel that  worlds economy will not perform then you can increase your asset allocation in gold.


Fixed Income products :

Fixed income product considers fixed deposits ,post deposits , and various debt products available in market . In coming years you can expect 7 to 12 percent return in this asset class . It has always beaten inflation in long run . Its highly liquid and it gives stability to your portfolio . I highly suggest to allocate at least 15 to 80 percent of your portfolio depending on your age.                                            


Domestic equity market :

Best way to participate in economy is through equity market . People loose money in equity market if they don't apply logic and relying on magic . Intraday trading , F&O trading , buying penny stocks,   buying stocks on rumors and not on fundamentals are the area where people loose money and finally one day he will quit equity market saying " its not his cup of tea" . If you don't have a neck on  stock picking or you don't understand economy then you should participate this asset class through  mutual funds . let fund manager do this job paying negligible fees.  Again like real estate timing is very important in equity market . In long run it has fetched around 18 percent yoy since 1980 . It will continue to deliver similar kind of returns in future . Allocations to equity market will always give you that extra kicker to your portfolio . Considering average age of Indians is 26 , i cant believe that Indian economy will not perform .Equity market is the reflection of economy in the long run. Price to earnings, price to book value , earnings growth etc are certain parameter through which you can judge weather market is expensive or not .


Overseas equity market :

More and more people are travelling abroad, More and more people want there child to study abroad . World is now a smaller place than it used to be before 50 years back. India is import oriented country so our currency is going to depreciate further in coming years . If we will not participate in dollar or other foreign currency then travelling abroad , studying abroad will be more tougher and rs vs dollar will always pinch you hard  rest of your life . So If you are young I would always advice to park at least 20 percent of your portfolio in overseas market . Eg . Last year US market has delivered 13 percent but if you are Indians you earn 25 percent ( 12 percent currency depreciation ) .

Private equity :

If you are HNI (High networth individual) than part of your wealth can go to private equity. Its high risk high return asset class. Basically in private equity you are taking stakes in particular company which you are bullish on and if company needs funds. Private equity is risky as there are no regulators but it can deliver tremendous returns. You need to consult private equity consultant before you invest and it needs expertise .


Diversify your portfolio using this few asset class to create serious wealth . People make mistake to park there entire wealth in single asset class. Think wise ... Think twice .!!!!!

STOCK MARKET VALUE CREATORS OF THE NEXT ECONOMIC BOOM

With a market rally that has surprised most(not all) we are today in a situation where a number of Large Cap stocks that have decent balance sheets are no longer extraordinarily cheap. This has happened at a time when the domestic investor participation in Indian Equities is at the lowest since the end of the last boom. Essentially most of the Indian investors have missed the move up in the markets over the last 2.5 years. The apathy towards equity has continued to remain high even as the economic activity has bottomed out. News flows on persistently high inflation, strong tax free returns from tax free bonds, volatility in the markets due to the volatility of the Indian Rupee have been contributors along with the negative news flow generated due to the economic slowdown and the various scams in the UPA2 regime.

Now to potentially see the best value creators of the next economic boom in India, which can be delayed but not denied we need to see and cull out the companies that have either learnt the hard way from the previous downturn and now recognize the risks they took and that those risks were not worth it or the companies that handled the downturn well by being wary of taking big risks upfront and are now in a strong position to ride the next move up.

I have typically been a bottom up investor. The reason my  approach  to  investing  has  been  typically  bottom  up is that I  have  observed  is  that  such  an approach typically  ends one to the same results as a top down approach but in a more  efficient manner. Because here one is focusing first on micro research and then trying to evaluate the same in a macro environment. Let’s look at an example from the past. One of the key sectors where I invested at the beginning of the last bull cycle was the automobiles sector. Volume growth combined with on capex and consistent cost  cutting was a potent combination in an industry such as auto with high operating leverage. For example a company like Mahindra and Mahindra which used to break even only at a tractor production level of over 100,000 at a time when they were unproductive had brought down their break even levels to 30,000. My key picks at that time were M & M at Rs 100 levels and Tata Motors at Rs 75 levels. An overweight position in these two stocks based on bottom up research finally led me to the same result, as a top down positive view on the auto sector would have resulted in.

Lot of these companies had learnt from their overinvestment in the last cycle, which created stress and took these companies into losses. A very good example of this leering from the past in the current cycle has been that of Cement Companies that went into huge losses in the late 1990’s and early 2000’s but handled the current downturn of 2010-14 very well.

My essential point is that the last boom in India created a lot of first generation companies that had  never seen a severe downturn. Now a large number of them have taken a huge amount of pain over the last 4 years. The aim this time is to identify those which are now prepared to operate with a lower risk model in the next cycle and have got good business models.  The second part of companies to buy into are those which never had balance sheet stress, however the macro environment hit them badly. These companies also never focused on productivity during the boom years and now will have two things playing for them. A lower cost base and hence higher operating leverage combined with better top line growth. These companies will see a significant uptick in valuations.  Over a period of time the company deleveraged, added capacities via tying up with stressed units rather than investing of their own, focused on cost cutting, developed superior products etc. This led to a rerating of the company from a 5 P/E ratio to over 25 P/E today.

In my experience stock prices move on the following two major factors.                                                

The up gradation or downgrade of earnings vis a vis consensus earnings forecasts – Let me try to explain this in a simplistic manner. The stock markets discount news flow very fast and as such the price at which a particular stock trades are dependent on what the expectations in the markets are. At the beginning of the last bull cycle of 2003 every one was very negative on growth prospects and in general expectations of earning growth were very low. Under the circumstances as the economy revived most companies came out with results better than expectations and stock prices moved up sharply.  On  the  other  hand  at  the  peak  of  the  bull  cycle  at  the  end  of  2007  earnings  growth expectations had moved up very sharply and subsequently there was an economic slowdown and most companies  started delivering results much below expectations. This led to stock prices falling sharply.

The movement of the direction of the return ratios of the company rather than the absolute values

– Measures like Return on Capital Employed and Return on Net worth are used to determine how well the company is using the money it has to make profits. Typically it is believed that higher these ratios the better it is. Although this is true, the actual movement of stock prices depends more on the direction of these ratios rather than their absolute value. That is the reason why turnaround stocks which go from losses to profits give huge returns as the return ratios go from negative to a positive value. Examples of these are Automobile and commodity stocks in the early part of this decade where they went into profits after years of losses and most stocks in these industries went up multifold.

Will write more on my thoughts later as this piece is becoming too long. We are at the threshold of a new economic and market cycle as I pointed out at the beginning of 2014.

Key is to ride it or walk by the side and be left behind.