Will this be the sought after asset class in 2012?

Jan 7, 2012

In this issue:
» A fresh crisis threatening to burden global economy
» Mobile network usage getting skewed
» Is the worst over for the Indian economy?
» Global audit firm brought to book
» ...and more!

We have discussed the potential for stocks, gold and real estate to find a place in investor portfolios in 2012. Despite the worries about lingering inflation, domestic slowdown and global crisis, each of these asset classes have their own merit. But only if invested in with the correct perspective in mind and for the correct time frame. However, there is another asset class which Indian investors can ignore at their own peril in 2012. That is 10-year government bonds.

Benchmark 10-year bonds recently completed the biggest weekly gain since May 2010. It is common knowledge that bond prices move higher with softening interest rates. And if the expert views and economic indicators are anything to go by, interest rates will move in only one direction in the new year. Southwards. With inflation showing signs of getting tamed, albeit gradually, the logic for the RBI to keep liquidity tight does not sustain. Further, the Reserve Bank Of India (RBI) deputy governors have not minced words when it comes to citing that the rates have peaked. These are encouraging signs indeed for investors to add to their bond holdings. Moreover the fact that global rating agencies have reiterated the investment grade rating for India's sovereign debt rating makes the case for long government bonds stronger.

India's bond market, though still at a nascent stage, has a vibrant future with the necessity for long term debt and private sector participation becoming imminent by the day. Most of the long term bonds issued by infrastructure financing companies will also be tradable on the exchanges after the initial 5 years. Thus the debt portion of investor portfolios can no longer be restricted to fixed deposits and Public Provident Funds (PPF). Ignoring the potential in long term bonds may not be the best investment strategy in 2012.

Do you think long term bonds will be the most sought after asset class in India in 2012? Let us know your comments or post them on our Facebook page / Google+ page.---------------------------------------- Did you miss the Webinar? ----------------------------------------

Equitymaster's Webinar on the Future Prospects for the Indian Economy with Mr Ajit Dayal was broadcasted on 30th of December, 2011.

The webinar answered questions that could be troubling any Indian Investor today. Where is the Indian Economy headed in 2012? Is Gold still a good investment? Could the Stock Market touch the 21000 figure in 2012?

If you missed watching the webinar, here is your chance to access the same.

Click Here to watch: Indian Economy - From Darling to Damned (Rebroadcast)

And let's understand what lies ahead for India and how could this impact your investments.


 Chart of the day
As per global analytics company Dealogic, companies world over shied away from initial public offerings in 2011. Despite a strong start, the number of initial public offerings (IPOs) fell by more than two-fifths in 2011 from 2010. Almost as many deals were withdrawn or postponed as during the height of the global financial crisis in 2008. Worries about many countries' financial health soured investor confidence. However, if one looks at the numbers, the issuances in primary markets in India were just a fraction of that in developed and emerging markets.

Data source: Dealogic

Mobile penetration has been on the rise not just in India but across the world. The ease of using the phone anytime anywhere has led to a rapid rise in mobile usage. As technology has evolved, the phone now doubles up as a mini computer that allows users to use and share data, take pictures, etc. And this has further led to increased penetration. However, the usage pattern of mobile phones is very varied. As per a recent study conducted by a European advisory company, the top 1% users generate around 50% of the total mobile traffic. The top 10% generate around 90% of the traffic. The skewed usage is another example of a few individuals controlling a scarce resource. Something that is increasingly becoming a trend and subject of socio-economic turmoil. While one could argue that this skew in mobile usage is strange; however, it is just another indication of how the resource allocation and usage is more skewed towards the higher income groups of any society.

We have barely gone past the first week of 2012 and a fresh crisis is threatening to put further pressure on an already overburdened global economy. The epicentre of this new crisis is the European nation of Hungary. The word has it that the country's debt has been downgraded to junk status. Apparently, Hungary has pushed huge forex losses down the throat of foreign banks and this is now making investors extremely jittery.

But how did these losses arise in the first place? Well, overseas lending to Hungary is something in the region of 100% of its GDP and with its currency suffering a 40% fall since the Lehman crisis, it has become next to impossible for Hungary to service all of its loans. What has made matters worse is the fact that the Hungarian PM has forced foreign banks to accept currency losses rather than pass the burden on to his citizens.

Foreign banks are understandably quite angry about this and have threatened to quit the country. And as expected, this event is not just affecting Hungary and its lenders but the repercussions are being felt far and wide. Confidence level amongst European banks is sinking by the day, leading to reluctance on their part to lend to each other. What more, even Indian firms are likely to suffer as borrowing costs goes up for them on account of such events.

If anything can go wrong, it will. This truly reflects what we witnessed for Indian economy during the year 2011. Incessant rate hikes by Reserve Bank of India (RBI) failed to tame inflation. Uncertain global business environment adversely affected exports. Foreign investors kept themselves away from the Indian economy. The corporate world witnessed major scams such as illegal mining and the 2G scam. In addition, the government did contribute to the woes. Policies for economic reforms remained in limbo. Finally the much-talked-about growth rate of Indian economy got hit badly. And now we are in 2012. Can we expect something different going forward?

Yes, we can. Some of the leading economic indicators at least suggest so. For the last few weeks, food inflation is hitting lower levels. Softening in global commodity prices would further lower inflation. RBI has already paused rate hikes and may even consider lowering rates. Any attempt by the government to fast forward reforms will act as growth catalyst. True, it is too early to say that everything would be alright in 2012. However, all this signals that 2012 would be better than 2011 for the Indian economy.

We are not sure if this story should come to you as a shock or not. But given the past track record of leading global auditor PricewaterhouseCoopers (PwC), we were not at all taken aback to hear that it had been fooling local British regulators for seven long years. What had it been lying about? Well, PwC had been lying that JP Morgan Securities was keeping client money safe. As it has turned out, most of the client money from the futures and options trading was being shifted into interest bearing, unsegregated accounts at JP Morgan Chase bank. This means that client money ranging from US$ 1.9 to US$23 bn was held in unsegregated accounts and this money would have been at risk of loss had the lender become insolvent. Now, the auditing firm has been asked to pay a hefty penalty worth 1.4 m pounds (US$ 2.2 m). We hope that audit firms and rating agencies finally become more accountable for their opinions.

The Indian stock markets were up by 2.8% during the week. All the sectors ended in the green for the week apart from FMCG (down by a negligible 0.1%). Positive global cues along with lower food inflation number presented a possibility of a revival in the Indian economy. In fact, food inflation entered into the negative territory (-3.36%) for the first time in about 6 years, raising hopes that RBI could start cutting interest rates soon.

Amongst the other world markets, the investor sentiments were optimistic. Barring the Asian markets of China (down by 0.5%) and Japan (down by 0.8%) and that of France (down by 0.7%), all the global stock markets ended the week higher from where they started.

Data source: Yahoo Finance, Kitco

 Weekend Investing Mantra
"Even when the underlying motive of purchase is mere speculative greed, human nature desires to conceal this unlovely impulse behind a screen of apparent logic and good sense." - Benjamin Graham

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10 Responses to "Will this be the sought after asset class in 2012?"


Jan 19, 2012

tell me gold tips



Jan 18, 2012

how to get profits from share market



Jan 17, 2012

Are Govt bonds as volatile as stocks - or they are like debt class?
What are typical retruns on govt bonds - throw more light!



Jan 10, 2012

what is meant by this bonds.


shome suvra

Jan 9, 2012

Liquidity management should be sustained by RBI through open market operation,reducing money market congestion so that there is less withdrawal of money between banks and mutual funds,Govt decision to increase FIIs in both Govt & corporate bonds provided there can be less FII inflows owing to Euro zone liquidity crunch reducing the attractiveness of bonds.


sachin sehta

Jan 7, 2012

what is the mutual fund and how to invest in it.


sachin sehta

Jan 7, 2012

what is the zero coupon bond


sachin sehta

Jan 7, 2012

how many companies are listed in Bombay stock exchange


sachin sehtas

Jan 7, 2012

i want to purchase share of government company but i have no knowledge about it what is the my first step regarding this



Jan 7, 2012

The week-end wrap-up was quite enlightening. There certainly are clear indications that long term bonds will be the sought after asset class in India in the current year, 2012.
The data on mobile phones was really informative and interesting.

Equitymaster requests your view! Post a comment on "Will this be the sought after asset class in 2012?". Click here!