The Best Investment In Uncertain Times

Mar 10, 2010

In this issue:
» Retail participation missing in India growth story
» China committed towards US Treasuries
» India corners a fifth of PE investments
» Delhi, Mumbai most livable cities
» ...and more!!

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When in doubt as to which method should be adopted to steer away from volatility in financial markets, we turn to the wisdom of geniuses in the investing world. It would however be appropriate to say that it was our sheer good luck to chance upon a memo written by the legendry Sir John Templeton himself. Sir Templeton believed to be the pioneer of global investing was known to share his priceless investment wisdom during annual meetings.

Exactly three years before he expired in July 2008, Templeton had done the unthinkable. He had predicted the looming global financial crisis by penning a memorandum to friends and family. The memo now published by a financial portal seems uncanny and prophetic in its vision of what would happen to the US and global economy.

Templeton titled the memo "Financial Chaos". It brings out the view that Templeton believed US had passed its period of peak prosperity as early as 2005 itself. "Over tenfold more persons hopelessly indebted leads to multiplying bankruptcies not only for them but for many businesses that extend credit without collateral. Voters are likely to enact rescue subsidies, which transfer the debts to governments, such as Fannie May and Freddie Mac". This quote seems to hit the nail on its head and had the potential to change not just the US' but the fortunes of the world economy had it fallen in the correct hands.

But what intrigued us most were the final words of the memo that could be considered as the mantra for investing in equities. "Not yet have I found any better method to prosper during the future financial chaos, which is likely to last many years, than to keep your net worth in shares of those corporations that have proven to have the widest profit margins and the most rapidly increasing profits." We doubt if there is any better way of articulating the best method to prosper during uncertain times.

 Chart of the day

Data source: CMIE

As India tries to catch up with China in the race for economic superiority, a critical benchmark will be the nation's ability to support indigenous infrastructure and consumption growth. As today's chart shows, India has steadily increased its investment in new capacities in the past decade. The investment which is expected to comprise 7% of India's FY10 GDP is estimated to rise up to 9% of GDP by the next fiscal.

Studies after studies have shown that very few asset classes enhance purchasing power like equities do. Yet retail investors in India have shown no affinity towards investing in equities. A study by a business daily has revealed that retail investors, on an average, owned 12% in all the listed companies in India in 2009 as compared to 13% in 2006. What explains the apathy? To be honest, the period considered for the study was indeed quite small. Secondly, it was marked by one of the worst bear market in recent times.

Confidence in an asset class is all about earning stable returns. But when an asset class plunges by 60% in a span of few months, very few people would be brave enough to once again commit money to it. Historically too, Indian equities have known to give quite lumpy and volatile returns and this seems to be the primary reason for the retail investor apathy toward stocks. However, the situation could change for the better. A better understanding of the risks involved in equities would perhaps go a long way towards addressing the problem. Also, as the influence of FIIs wane and domestic investors, be it domestic institutions or other investors, start having a greater say in the movement of stocks, the volatility in price may also be stamped out to a great extent. To conclude, if the underlying fundamentals are strong, like they are in India, it is only a matter of time before retail participation increases.

It should be music to the ears of US authorities that China is now claiming to be long on US Treasuries. Being the biggest buyer of US papers, China had been showing concerns over the diminishing value of US Treasuries after the subprime crisis and dollar devaluation. However, the dragon economy now seems to be finding more value in the greenback. It is estimated that China's reserves are about US$ 2.4 trillion. China believes that it would be impossible for gold to become a major investment channel for China's foreign exchange reserves. The economy that currently holds about 1,000 tonnes of gold would not have an exposure above US$ 30 bn even if it doubles its exposure to the precious metal.

Emerging markets are enjoying a robust inflow of money at present. And India is right in the thick of it. For instance, if one looks at private equity (PE) investments, emerging markets across the globe received PE investments of US$ 22.1 bn in 2009. This was 54% lower than in 2008 largely due to falling transaction sizes. Out of this, India accounted for more than one-fifth at US$ 4 bn. Given that Asia and more notably India and China have been growing at healthy rates, the attractiveness of these markets to PE players is hardly surprising. Especially when the developed world is not completely out of the woods yet. Having said that, in China and India, too much money flowing in would also mean that valuations will start to look a tad bit frothy. But for the time being atleast, these markets continue to maintain their allure.

India's micro finance industry is in for an overhaul. For the first time ever, the companies in the industry will start registering details about their borrowers with the national credit bureaus. Micro finance lenders are those that give out small loans to poor entrepreneurs. Competition in the sector has been heating up off late, which gave rise to the apprehension that in a bid to secure more customers and increase the size of their portfolio, these companies may end up over extending themselves to many poor borrowers. Thus in turn giving rise to a wave of defaults. To ensure that borrowers do not take up too big a liability by one person borrowing from many different companies, the players in the industry have come together to provide details of their customers to credit bureaus which will help in monitoring the same.

Housing is one of the biggest problems facing the average middle-class city dweller in India. No matter how good the job prospects become, that dream house continues to remain just that - a distant dream. It seemed that the situation would change with the launch of affordable housing that several builders announced during the economic slowdown. But it was not to be. With the uptick in real estate prices, most of them are now stalled. In any case, most of them are located at far flung places away from the central business districts. Imagine our surprise then, when as per a recent study, Delhi and Mumbai rank as the first and second most livable cities in India. Probably, it has to do with factors such as demographics, education, medical standards and safety. Because purely going by housing and the time of daily commute, we wonder how the nation's political and financial capitals can be termed better than some of the smaller but upcoming centers.

After a buoyant start today Indian markets succumbed to profit booking in heavyweights during the latter half of the session. Select stocks from the power, IT and telecom sectors weighed heavy on the indices. The benchmark index, the BSE-Sensex was up by around 25 points (0.2%) at the time of writing, while its smaller peers, the BSE- Midcap and the BSE- Smallcap indices were down 0.3% each. India is currently lagging the gainers in Asian markets.

 Today's investing mantra
"As an investor with large amounts of capital, one can invest in businesses that regularly require large capital expenditures. As long as these businesses have reasonable expectations of earning decent returns on the incremental sums they invest." - Warren Buffett

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5 Responses to "The Best Investment In Uncertain Times"


Mar 10, 2010

i like it


Somen Choudhury

Mar 10, 2010

Good article.
I usually read this news letter everyday and get to know lots of interesting facts.
One comment:
On the China foreign reserve topic, the gold reserve quantity should be corrected. It can not be 1,000 ounces.


N.M.R Shreedhar

Mar 10, 2010

The best investment -- depends on what one is looking for.
If the objective is to build up wealth slowly over the long-term with expected returns in the range of 15~20%,investing in fundamentally sound companies at regular intervals (SIP way of investing)seems to be the way. Investments in MF's can also be another option for the conservative investor. Investments in Land is also popular --this gives you guaranteed capital protection and appreciation, only liquidity is an issue. Investments in Gold used to be favoured earlier--in fact,old timers used to say that 10gms of Gold is adequate to meet your monthly expenses whatever be the cost of living (is it true ?? maybe Equity Master can take up as a research ). regds


Prasad Khanolkar

Mar 10, 2010

Sir John Templeton's final words clearly indicate a bright future in equity investments. To top that we have equity master with us.



Mar 10, 2010

"The Best Investment in Uncertain Times" made very interesting reading. John Templeton's prophetic words give a clear indication of the path to propertiy even during adverse circumstances. One has to keep one's networth in shares of companies which have proven profit making record and which can also create in the propective investors the strong impression that their profits would progress further. The investor, for his part, has the inevitable duty of doing requisite spade work to locate the right companies.

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