Friday, December 30, 2011

Stocks 2012

(My annual piece for the year end issue of the Dalal Street Journal) 2012- A long year for stock markets 2011 will go down as one of the most frustrating years for the Indian markets. It also is a year when the India story started to sound less than convincing, to global investors. It is also the year where the supply side constraints have kind of imposed a lingering consumer price inflation which is stubborn and the RBI has tried to hold it down with over a dozen interest rate hikes. Alas, the interest rate hikes seem to only have added fuel to the fire. A panic stricken RBI has freed interest rates on savings bank accounts leading to a free for all within banks to grab deposits. Liquidity has dried up so much that even SBI is offering near eight percent returns on deposits for just one week! The PIIGS problem in the Euro has awoken the world to the evils of living beyond one’s means. However a conclave of the wise men of the Central Banks of Europe and a few countries are putting up a brave front and offering to pump in more of the printed currency. Is this going to turn the markets around or is it a golden opportunity to exit? Reason supports the latter and hope supports the former. Now, Central Banks are resorting to window dressing! There is a fair chance that the world is heading to a kind of stagflation (with Central Banks printing more money and producers not producing more). It may take a long time to unwind, but looks like we are headed out there. Every country’s finances (barring maybe a China here and a Russia there) are in bad shape. Political survival worldwide seems to be the excuse for fiscal profligacy. Indian economy continues to grow on the back of strong consumer demand. Consumer still has his pockets full thanks to services growing at a decent clip and rural India enjoying the benefits of high farm produce prices. In addition, government freebies (whether it is NREGA from the Centre or other state sponsored freebies) give more thrust to consumer muscle. The banks have also joined the party, with auto loans being given at ridiculously low interest rates of six to eight percent when SME’s are paying over fifteen percent . Add to that the liquidity crunch and the weakness in capital markets, supply bottlenecks grow whilst demand continues to keep rising. A natural outcome is inflation. Over a dozen successive doses of misguided interest rate hikes by RBI has only fuelled inflation rather than taming it. Indian politics has done nothing to encourage investment, being hit by one successive accident after another. Commodity prices will remain soft so long as global economic growth is weak. Gold and silver continue to shine as excess money chases safer havens. The US dollar is the ‘last man standing’ when it comes to currency, thanks to the Euro tottering. In all this chaos, our stock markets have held up remarkably well, with valuations still in excess of fifteen times earnings (that will perhaps fall in the next year). Whilst a one year picture does not look very good, the Indian market show, if we measure it from the bottom of the Lehman crisis, is fantastic. Yes, traders have not had a good time and luck with market timing perhaps had more than its fair share in the way we measure our gains from investing. Fixed income instruments are offering interesting returns of eleven to twelve percent on AA rated paper. SBI is offering eight and a half percent returns on one week money! Short term money is as expensive if not more as long term money as companies postpone projects due to fund raising constraints. Perhaps, one to two year returns on these will beat stock market returns. For stock market returns to be good, we need falling interest rates. This gives us a great option to buy tradeable fixed income paper now and sell it when interest rates fall (will they fall significantly is a debatable issue).I will stay invested or add to Gold. Equities are yet to turn interesting. Perhaps a decline to BSE Sensex levels of around 14000 or so would make it more value investment than now. In the absence of long term leveraged options, trading in volatile markets is going to be tough. I will still remain invested in stocks of companies focused on domestic demand and having high (preferably over thirty percent per annum) Return on Equity (ROE). The upside seems capped for a couple of years at least. Fixed income returns at eleven or twelve percent per annum look all set to beat equity returns over the next couple of years. Unless of course we have a great fall and can then buy in. R. Balakrishnan (balakrishnanr@gmail.com) December 6th, 2011

Saturday, December 17, 2011

Financial Planning-

(An article in the Economic Times, by an 'expert' set me thinking... Financial Planning sure is complex.. The article went round in circles and ...) This article appears in the latest issue of Moneylife FINANCIAL PLANNING OR ADVISE? CHOOSE CAREFULLY.... Recently I was reading an article by an expert on ‘Financial Planning’. It was amazing and an eye opener for me. Apart from talking a lot of gas, his expert advice stunned me. In brief, he said that everyone must save one third, spend one third and the balance one third (all of “NET income”) can be used for meeting debt repayments. Suddenly it struck me. No wonder I can’t plan for myself. In all my years, I struggled with such a poor income that I had to foolishly spend almost ninety percent of my “NET” income on useless day to day things. Only if I had received this sound advice when I started my career? By now I would have been filthy rich. Whether I would have physically survived is a different issue, considering that most of my expenses were towards daily needs. Of course, if you earn enough just to make ends meet, you are of no use to anyone in the financial services industry, since you cannot generate enough money. I also did not have enough borrowings to meet the criterion of having to use ‘one third of my net income’ to be used for repayments of loans. I borrowed very late in life (since in my early days, I did not have enough of margin money to put up as my skin in the game). Also, to keep my expenses within one third, useful hints included “Keeping a limit on unavoidable expenses”, “negotiating”, “bargaining” etc., In “Negotiating” it included such day to day expenses like “room tariff’ in case of hotel bookings etc., The piece also included some hints on using online shopping. By inference, financial planning appears to be a tool for the very high income earner only. Spend restricted to one third of ‘Net’ monthly take home pay. Save at least one third of ‘net’ take home. Does it mean that in reality I save more than one third of my gross? Also, what about my personal situation? Does the one third rule hold good whether I am single, double, have kids, no kids, have house or not, ..? What if I cannot live within one third of my net salary? Does it mean that financial planning is not for me? I always think that if you have to ‘plan’ something with a calculator, it is not worth planning. Salaries and prices keep changing, needs keep changing. So, savings for me is actually a residue. If you earn enough, then you put away something regularly. Now we have a plethora of choices, so I make mine depending on my greed and stomach to take risks. Of course, I have goals. Those goals certainly depend on what I earn and what I can spare. I think one cannot have a goal and then work out the finances. Things have to move from the realm of possibilities to certainties. Only then will I aspire for something. Surely, if I do not save enough, no planner can help me reach a dream. A dream has to be within the boundaries of probabilities. Yes, maybe I may need help in choosing a reasonably good path to get there and a financial advisor may help. Should I make a distinction between the role of a financial planner and a financial advisor? I think it becomes absolutely necessary. My planner should not be compromised because he is also an authorised seller of some product and he gets a commission from that. It is essential that I pay my planner a decent sum so that I get good help with my finances, rather than rely on some “one third” nonsense that I read in the papers. A good financial planner will start with what I have, what I can expect to earn and save rather than ask me what I want and pre-decide what I should save. If he listens to me, prods me and guides me, he has done his work. I can always turn to an advisor for choosing a product or do it myself. In this way, I do not dilute the quality of advice my planner gives me. I think this is extremely important. I do not like those planners who offer ‘planning’ for a fee of nothing to a thousand rupees and then send me forms of mutual funds and insurance products or bonds etc., I want a planner who does not use a silly template and then classifies me as ‘moderate’ ‘aggressive’ or ‘foolish’. I want him to spend time with me, understanding what I have and what I need and giving me paths to choose. That would be the best thing a ‘planner’ can help me out with. I clearly think that the planner and advisor should be separate persons, in order to avoid any conflict of interest. It may be worth having an annual contract with an advisor, where we pay him an annual fee for spending some time with us, holding our hands in money matters and then guiding me. Here, I have to change my mindset about getting ‘free’ advice. The person, who gives me free advice, has no commitment and I cannot hold him responsible for anything. But one thing is clear to me. Financial planner and financial advisor are two separate persons, not from the same organisation and I need them both, perhaps. November 26th- 2011