Can this asset of the decade go higher still?

Jan 2, 2010

In this issue:
» Will gold turn out to be the asset class of choice in the next decade as well?
» S&P 500 could jump 200%, says Faber
» Value investing has given killer returns in India
» Corporate India on improvement path after Satyam
» ...and more!!

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So, we have bid goodbye to the noughties. But for those even remotely linked to the financial world, the decade gone by is likely to leave a permanent imprint on their minds. If for nothing else, for the sheer rollercoaster experience it provided. Roughly one half of the period was marked with unprecedented boom. A synchronous Bull Run that perhaps left no geography and no asset class untouched. This Bull Run though came smack in the middle of two busts. Needless to say, the second one was particularly devastating, inflicting mayhem in all corners of the globe. Not surprisingly then, price volatility was the order of the day.

Amidst all the madness there was one asset class that remained rock solid right till the end. In fact, it ended each year of the decade higher than the price at which it started the year. Thus, if there is one widely accepted asset class that deserves the title to be the asset of the decade, it is none other than the yellow metal gold. As per a story in LiveMint, Gold witnessed a near fourfold jump in its price over the past decade. It beat other contenders like crude oil and the Indian Sensex, which were up around three-fold, by a handsome margin.

Now, to the question that we are sure would be on most investors' minds. Will Gold outperform in the coming decade as well? We may not like to hazard a guess on that one. But we are fairly certain about is its ability to continue giving attractive returns. As one financial expert rightly put it, "Gold no doubt is a speculation but it is a speculation on a certainty. And that certainty is the debasement of currencies." Thus, gold bugs can continue to keep the faith. But as we have always said, do not go overboard with your gold investment.

 Chart of the day
We wrote about a certainty as mentioned by one expert in the previous paragraph. Today's chart of the day corroborates it further. As it rightly depicts, Central Banks around the world have taken to money printing in a big way in order to stave off the financial crisis. Most notable is a huge increase in the monetary base in the US, the current reserve currency of the world. Needless to say, this could cause the dollar to depreciate significantly unless the US Federal Reserve calls all of it back. However, such an action looks like a remote possibility. Hence, in order to prevent erosion in dollar assets, investors across the world might diversify some of their dollar holdings into other alternatives like emerging markets and gold, a trend that has already started taking shape. And the dollar might not be the only one to suffer. Similar fate could also await the Euro and the British Pound.

Source: Daily Reckoning

One of corporate India's worst scams seems to have taught managements a wise lesson. Or so it seems. Internal controls have improved in corporate India since Satyam fiasco came to light. This is if one were to go by DNA Money's interview with Porus Doctor. Mr. Doctor is a partner with Deloitte India, one of the auditors of the government-appointed board of Satyam.He also believes that independent directors need to invest more time in companies they direct. As he says, "Two hours in a quarter in a meeting in a board does not necessarily give them the right equipment to direct company affairs."

We at Equitymaster believe that independent directors are not the only ones to blame for the Satyam fiasco. Look at the evaluation systems that boards, auditors, credit rating agencies and bankers apply to judge companies. You will find glaring loopholes! The role of companies must be to find creative and productive ways to help build societies. Frauds like Satyam and its chairman is definitely not what we want.

Value investing works and works big time! Numerous studies have proved how value investing - a method of creating a portfolio of stocks that are trading at the cheapest valuations when measured on conventional valuation parameters like price to book value and price to earnings - have given market beating returns over a long-term period. And what's more, the same approach has given Indian investors stellar returns in the current Bull Run.

As per DNA Money, companies from the BSE 500, which had single-digit P/Es during March 2009, when the market was trading at its lows of the most recent bear market, have on an average, tripled investor wealth since then. This is way better than the Sensex, which managed to gain a little over 100%. Infact, some companies have risen as much as nine times over March lows, adds the article. Clearly, if one follows the simple strategy of being fearful when others are greedy and greedy when others are fearful and invests in companies with sustainable business models, he may not learn any other investing lesson in his entire lifetime and still achieve better returns than most financial experts.

The S&P 500, the US stock market index, could jump 200% in the next decade, says the maverick investor Marc Faber, in his most recent Gloom, Boom and Doom report. "I suppose this will happen over the next 10 years or so. Eventually, the U.S. government will have no other option but to print massively to finance the growing fiscal deficit", observes Faber. Certainly. If the US Federal Reserve keeps providing the economy with truckloads of cash, the economic activity is likely to pick up, thus giving a boost to the stock markets as well. But please bear in mind that there is no such thing as free lunch in economics. The US dollar could also depreciate appreciably in the coming years, making most of the gains that could come from the S&P 500 nearly worthless. Hence, for an US investor, gold and other hard commodities could still prove to be a better investment.

Fresh into 2010, many experts are positive on global economic recovery and rise in asset prices. And then many aren't. One amongst them is Paul Krugman, the Nobel Prize winning economist and a noted writer on economic matters. In his latest post in the New York Times, Krugman sees China as posing a major risk to world (mainly the US) economy in the current year.

With the dragon nation keeping an almost fixed currency, it puts other exporting nations on a negative footing. This is because if China were to free its currency, the same would appreciate on the back of huge foreign capital inflows that the country absorbs and its huge trade surplus. This would be detrimental to its exporters who otherwise benefit from a pegged currency. And with its currency pegged, manufacturers in other nations (including the US) will never be able to compete against it. This would continue to impact their economies that are showing initial signs of improvement after last two year's crisis. Krugman's solution? China will have to appreciate its currency otherwise it faces the prospect of increasing protectionism.

Stockmarkets across the world continued to be in a celebration mood as majority of them ended the week on a positive note. While the Indian stock markets were not amongst the top gainers this week, they did manage to end the week on a positive note. India's benchmark index, the BSE-Sensex ended with weekly gains of 0.6%. Last week, the Indian markets were amongst the top gainers with the BSE-Sensex ending higher by about 3.8%. The US stock market was amongst the few major markets to end the week on a negative note, as it edged lower by around 1%. Amongst commodities, while gold continued to be in a price correction mode, crude oil advanced nearly 2%.

Source: Yahoo Finance, Kitco, CNN Money

It should be noted that coming Monday onwards, the Indian markets will witness an early start to trading and hence, open at 9.00 AM.

 Weekend investing mantra
"The most common cause of low prices is pessimism. We want to do business in such an environment, not because we like pessimism, but because we like the prices it produces." - Warren Buffett

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2 Responses to "Can this asset of the decade go higher still?"


Feb 20, 2010

i am best fund st come som time.



Jan 3, 2010

independent directors are really not of much use in checking the frauds..normally the managements would let them know what the managemnts want them to know..even if they ask some questions ,true picture will never be presented to them by the fradulent management..after all the independent directors also appointed by the management only..If some independent director is too much asking questions ,they will simply drop him from the Board..What to say when even Auditors collude and camofluge the figs..The only solution could be if the punishment for such offences are so severe and implemented with all earnest this frauds could come down..But will it happen is a big million dollar question...

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