The Post Demonetisation New Normal In Safe Haven Assets... - The 5 Minute WrapUp by Equitymaster
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The Post Demonetisation New Normal In Safe Haven Assets...

Jan 6, 2017

In this issue:
» Goldbandi after Notebandi?
» The new high in Bitcoins
» What lies ahead for Telecom players?
» ...and more!
Tanushree Banerjee, Co-Head of Research

Our memories are short. The demonetisation in November 2016 was after a gap of thirty eight years. Yet there is a pervasive fear that we'll see another round of notebandi soon. Our trust in the currency has indeed been shaken.

Buying gold when trust in the currency is down has been the trend for generations. Safe havens such as the yellow metal and bank fixed deposits have always dominated the portfolios of risk-averse Indians. And they will likely continue to do so.

But we know that the returns from gold and fixed deposits are at a turning point.

Central banks the world over are hesitant to print money like have been. This may cause the demand for and price of gold to languish.

Meanwhile, Indian banks are too flush with funds to offer higher interest rates anytime soon. Credit growth is at a multi-decade low. Returns from fixed deposits are likely to only go lower from here. And so safe-haven investors are looking for other options.

Like bitcoin, for example...

Demand for the digital currency in India peaked post demonetisation. Just a few days ago, it equaled gold in value!

Now, keep in mind that the RBI has not approved Bitcoin as legal currency, and its acceptance is very limited. Gold is not a legal tender either. So Bitcoin and gold are stores of value and not practical currency alternatives. And Bitcoin is far from being a safe haven asset. Nonetheless, it has certainly become more appealing post demonetisation!

Now, we are not experts in predicting the fate of digital currencies. But what I know for sure is that demand for alternative safe-haven, yet remunerative assets, will soar.

Now, apart from gold, another asset class has stood the test of time. It has seen wars, the dotcom crash, epidemics like SARS, the collapse of governments, the 2008 subprime crisis... Yet it's emerged triumphant as a genuine safe haven.

This time will be NO different. Demonetisation will hardly dent its fundamental strength.

A disciplined approach to investing in this asset has fetched average annual returns of about 15% over the past three and a half decades. And the returns have been extraordinarily higher for investors following a contrarian approach.

The best thing about this asset is that the more the market panics, the more the opportunities to invest. And the better the returns!

So, the 'new normal' in safe haven assets is already here.

And the market could make way for this most promising safe haven asset class like never before.

It is for smart investors to grab the opportunity especially when it comes with a proven strategy.

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Incidentally, my colleague Asad Dossani, recently wrote whether Goldbandi is a remote possibility after Notebandi.

Being our commodity trading expert, Asad track prices of gold for a living. So his take on the possibility of Goldbandi, though fictitious for now, is not impossible!

Suggest you do not miss this one-of-a kind analysis on gold.

03:20 Chart of the Day

In a world where the value of fiat currencies is being called into question on account of reckless money printing by central banks, the virtual currency Bitcoin found many takers. The cryptocurrency has hit its highest level since December 2013. For the full year 2016, Bitcoins were up by 121%. That made Bitcoin the best performing of all the asset classes in 2016.

Sharp Surge in Value of Bitcoins

Before you regret missing out on the returns, let us shed some light on aspects of this asset class.

Bitcoins were launched in October 2008 with a dollar value of zero and no government backing. This means unlike other currencies, Bitcoins have no central bank backing. Further, bitcoins do not yet come under any regulations. With zero collateral and prone to illegal use, the currency is seen as a systemic risk.

And if bubbles have already started forming in Bitcoins, logic suggests that somewhere in the future this bubble will burst. The chances of the bubble bursting could be higher if governments and central banks find some way of regulating it.


Now with the third quarter result season around the corner, there is constant speculation about which sector will be the worst hit. Some say it will be banks. Some say it will be consumer durables.

These quarterly predictions are not for us. But what we agree on is that the telecom sector is certainly in for a rough ride. And we have been warning subscribers about this for months.

Competition is likely to dent the operating profits of even the largest players Bharti Airtel and Idea Cellular for several quarters. The twin impact of, Reliance Jio's launch and demonitisation will hit their financial performance.

Rahul Shah offered a very detailed explanation to our subscribers on this in an issue of Research Digest (subscription required).

  • There is a feeling that the day these companies start earning high ROCEs is not likely to come in the near future at least or even if it comes, it will be short lived because that's the way the industry functions.

    There will always be some or the other problem on the horizon that will put a downward pressure on margins and ultimately the returns on capital.

    And if one wants to stick to this view of things always remaining difficult in the industry, then there's no way the stocks can command the kind of valuations they are commanding currently.

By the way, the stocks of Bharti and Idea Cellular have fallen 28% and 60% respectively since Rahul wrote this.

To sum up, Rahul's views.

  • There is no way out of poor economics and substandard return on capital - at least not over the medium term.

In the meanwhile, after opening the day on a flat note, the Indian share markets have continued to hover around the dotted line. At the time of writing, BSE Sensex is trading down by 28 points (down 0.1%) and the NSE Nifty is trading down 7 points (down 0.1%). Sectoral indices are trading on a mixed note with stocks in the IT sector and FMCG sector trading in the red. Stocks in the banking sector are witnessing maximum buying interest. The BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap index is trading flat


As an aside, I, Rahul, Asad and our teams will be there at the Equitymaster Conference 2017. You are invited! Mark your calendar for 21st January 2017. More details here.

04:50 Investing mantra

"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent." - Charlie Munger

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Bhavita Nagrani (Research Analyst).

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1 Responses to "The Post Demonetisation New Normal In Safe Haven Assets..."

Monita Mehra

Jan 8, 2017

Gold is an unproductive asset for the country, it uses it foreign exchange to buy gold to be stored in home or bank lockers, what purpose does it serve? Foreign reserves decline and get negatively impacted.
I know gold is available in paper format but what %age of Indians buy gold in paper form?
From India's economic point of view, I think gold should not be promoted as asset class and if it has to be then only in paper form. You should mention it in your articles.

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