Sunday, October 30, 2011
(This is from today's Deccan Chronicle / Asian Age) FIGHTING INFLATION Protect returns from inflation Oct 30, 2011 - By R. Balakrishnan . .. The government is finally admitting that inflation is a problem that is likely to stay with us for some time and that it expects relief only by 2013. But the government also chooses to tell us that the ‘real’ interest rate is ‘positive’. Yes, if we believe that inflation is less than the post-tax interest return of around seven to eight per cent, we get on most fixed income (fixed deposits, bonds etc) options. For the individual investor, inflation is a post-tax impact. Hence, I will knock off the tax component of the interest income. At this juncture, the RBI has completed its 13th consecutive fiddling with upping interest rates. This would erode the value of my existing investments in fixed income paper. There is also a possibility that if inflation stabilises somewhat, there would be a hike in diesel prices, which would once again lead to an all round price hike. So, there is a constant fear of having to pay higher prices for the same goods. At the same time, investment confidence seems to be lower. This means that output may not grow much. Are we poised to enter a period of ‘stagflation’? Stagflation means rising prices with no growth in supply. This is scary. Suddenly, I find that there is no ‘real’ return but actually a painful erosion of wealth that is taking place. My daily expenses are galloping at a rate higher than the return I can get from fixed income investing. The broad market indices seem to be faring even worse. I keep reading about how quality US stocks are available with a dividend yield of five to six per cent. I do not see any Nifty or Sensex stock giving me that kind of a return, yet. So, should I put my money in to global stocks? The temptation is high. Global stocks would mean that I also take on the risks of the strength and weakness of the Indian rupee. Presently, the Indian rupee is at a low point. How low will it go? I think that as the world economy slips, the relative strength of the rupee should be higher. In other words, I am likely to get fewer rupees for a dollar. Will the global stocks appreciate enough for me to get a return that sufficiently protects the rupee return? The government does permit an annual limit of $200,000 per individual to be invested in any global market. This is a substantial limit (almost a `1 crore per head). Yes, gold has given positive returns, but how far will it go? Yes, gold and equities ought to have an inverse relationship. If economies do well, we would like to own equities and enjoy the growth. So I do not have to ‘run away’ to buy gold. Of course, there are many other commodities like copper or silver where also one can invest. So many worries are due to uncertainties caused by global economic turmoil, Indian economic slowdown and inflation. In the domestic markets, I will stick to companies which have high consumer driven growth. Consumer non-durables and couple of private sector banks that do not have the PSU culture and have consistent grow-th, clean balance sheets and low level of problem loans. In fact, even some of the large NBFCs look good. Unfortunately, we cannot have a play on food prices due to absence of producing companies in the listed place. That would be the place where I want my money to be. Depleting res-ources, increasing activism and rising prices are a potent combination for sharp gains.