Investing: Nowhere to hide

Managers of other people’s money are going through very difficult times, across the world. The global economy is going through such a turmoil that you cannot peacefully and confidently leave your money invested in any kind of asset. There is too much of senseless volatility in the markets too. The other problem is that everyone seems to have got used to easy availability of money. A few years ago, things were different; it was not unusual to think that once you make ‘enough’ money, you take to living life. Today, making money is an end in itself. So, minds are continually exploring things that have any potential to give some returns.

Investors are increasingly disillusioned with the opportunities in BRICs (Brazil, Russia, India and China)—the emerging economies that were witnessing high growth hitherto.

BRICs is no longer an attractive idea now and there is the new term TIGERs (Turkey and Poland are the new places to invest). In the 1980s Tiger economies meant the Asian economies of Thailand, Indonesia, Malaysia, etc, while the Indian elephant was called the caged tiger.

So, riding on fanciful ideas like these, money keeps flowing across borders, seeking high growth. In most cases, money managers end up wishing that they had remained elsewhere. The problem is that excess money comes from domains where the risk-free returns are very poor and the economic outlook is none too encouraging.

India is a fortunate beneficiary of this huge money pool that is continually crossing borders and invests in everything from currencies and commodities to equities. India cannot absorb too much money, without a bubble happening, given the poor liquidity in over 95% of our equities.

The deep economic problems all around the world seem to have become a permanent feature for the foreseeable future. There is only so much that a band-aid can do to stem a leak in a ship. Central banks are struggling and giving in to the pressures of printing more money, in different ways. Perspectives about credit risk keep changing ever so often. No country wants to ditch another merely because of a default. Lenders need borrowers to be around so that the latter can consume more of the produce of the lender nations. This is akin to a bar, where the owner of the bar wants his customers to keep coming back for more. Now, if this has to happen, the bartender has to ensure that no customer gets so drunk that his future visits will be put to an end. Alas, this philosophy does not seem to apply to moneylenders, who keep on pumping money till the borrowers get monetary indigestion. In this environment, it is futile to bet that any economy will continue to grow fast.

Amidst all these worries, stock markets around the world are doing very well, thanks to billions of dollars floating around. And, in this global dance of money, herd instinct is very pronounced—no asset class is left out. The other interesting thing is that, in addition to sovereign indebtedness, personal borrowings have also reached extreme levels in most developed economies. This borrowing is keeping the consumption cycle going, for now. How long before the debt becomes unbearable and leads to stagflation?

A flight to safety would have happened, given the experience of money managers in the emerging markets. Small countries took in too much money leading to severe mal-investment. However, the theory of ‘this time it is different’ is used as an excuse to keep the show going. So, markets are kept alive with hope and, if sufficient money flows into these markets, it becomes a self-fulfilling cycle.

In India there is a huge shortage of money for development programmes and infrastructure. The concept of public-private-partnerships (PPP) has already pushed up the costs of usage of infrastructure to unaffordable levels—whether it is the highway tolls or the airport infrastructure charges. Add to that, the stubbornly high interest rates, and there is no way infrastructure growth can happen at affordable rates.

The Western world is going through a vicious cycle of loan write-offs which, in effect, is partial destruction of wealth of the lenders. We too will experience it when banks, especially government banks, are forced to write off loans. As the loan books get rotten, even credible borrowers will find it expensive to borrow. All this means that investment options for investors are getting narrower. A flight to quality is already evident from the huge valuations of companies like HUL, ITC, Colgate, etc. Smaller stocks happen to be seasonal favourites, gaining momentum when the whole market is pushed up. I am not talking about trading opportunities that keep appearing with increasing regularity.

For the investor, risk takes a new meaning. Reasonable expectations can turn out to be unreasonable. You can decide when you want to enter the market. Getting out is out of your control. So, coming back to the basics, equities are best if they are looked at from a 10-year or longer horizon. For any fixed needs, it is best to rely on fixed-income investments, provided we don’t end up with poor credit quality.

It is very likely that we will see the world settling down to a lower growth trajectory. When that happens, the returns from equities will be closer to 15%. For equities to look attractive, alternate returns in fixed-income products have to come down substantially, to compensate for the risk in equities. So, take a pause. Instead of focusing on where the markets are headed tomorrow or in the next six months, decide what kind of risk you can stomach and what kind of money you can spare for the long term. Warren Buffet has famously said that he would like to own stocks of companies that are well run and produce profits. The companies should be such that it should not matter if the stock markets were to remain closed for some time. Of course, that destroys one essential requirement of sound investment, that is, ‘liquidity’. Perhaps Mr Buffet could say so because he likes to own virtually everything of a company and get involved in the management. We, ordinary investors, are more like the crowd getting into a train and hoping to reach our destination.

Well, our markets have done nothing over five years. At the same time, there are individual stocks that have delivered great returns even in the worst of times. And there are companies that have sunk, after being labelled as ‘blue-chip’ a decade ago. Some of those blue-chips are in the dying stages of selling their real estate and it is very likely that the promoters may not let the other shareholders get anything out of that either.

Quality of investments matter and, in our stock markets, it is best to be a sceptic. Did the person who bought Satyam stock a week before the scandal exploded, have a view? He perhaps never bothered about what he thought was a short-term trade. That leaves us with no room for disappointment. Regulators don’t help investors either, behaving more like the cops in the Bollywood movies, turning up after all is over. Corporate governance is good for lectures and seminars. It does not exist in the true sense of the word. Even the regulator is so forgiving that the sinner can simply ‘compound’ his offence and escape being branded as an official sinner.

So, the phrase caveat emptor is perhaps most relevant to the investor rather than anyone else. He is the buyer. He will be sold stocks, insurance, investments, plantation schemes, real-estate scams, multi-level marketing schemes, gold savings schemes, etc. There is always someone making a fool of some poor investor, right under the nose of the regulator. The odds are stacked against us. Invest safely.

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