Do you have an evergreen portfolio? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Do you have an evergreen portfolio? 

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In this issue:
» Why India has only itself to blame for the economic mess
» Another desperate measure by Finance Ministry to bring fiscal deficit down
» Will China's credit bubble bring the world economy down?
» Slowdown hits rural India too
»  and more....


00:00
 
Most of us hate cockroaches. We don't want them in our houses. Mainly, we want to kill them. But cockroaches have one remarkable and underappreciated feature. They're survivors. Cockroaches have been around for about 250 million years, so they've already survived a few mass extinctions. They've outlasted the dinosaurs, and millions of other species. So would it not be great to have a portfolio that is like a cockroach. A survivor which can withstand any business cycle. Be it expansion or recession. So how does one go about building a portfolio which is like a cockroach?

During this age of economic uncertainty, investors should want the perfect portfolio that can be relied upon to deliver long term. Over the long run, stocks have outperformed bonds. But there are periods where one has underperformed the other. During the financial crisis of 2008, stocks got hammered and bonds were the preferred asset class. But during the bull-run from 2003-07 bonds underperformed stocks.

So how does one allocate between stocks and bonds? One should increase allocation to bonds and lower allocation to stocks when the stock markets are significantly overvalued from a historical perspective. Stocks and bonds each have something to offer investors. While stocks offer long-term growth for investors with longer-term time horizons and a greater tolerance for risk, bonds provide income, diversification, and principal protection.

However, investors should also make sure not to put all your assets in one basket. This means making investments across diverse asset classes such as stocks, bonds, gold, cash etc. Gold not only provides a hedge against inflation but also enjoys a safe haven status. Cash, always a key component in any portfolio, is king. Although inflation erodes the purchasing power of cash, it is extremely useful during bad times. Hence investors should have a portfolio that even under the most undesirable situations holds value.

Do you have a portfolio that can survive most of the undesirable situations? Let us know your comments or share your views in the Equitymaster Club.

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01:50  Chart of the day
 
India is in a dichotomous situation as far as the economics of food is concerned. On one side, there are severe blockages in the food supply chain and the resultant high inflation levels. On the other side, India's farm exports have grown at a rapid pace over the last three years. Consider these figures... In financial year 2010-11, farm exports increased by 34.5% YoY. This was followed by 55.6% YoY growth in 2011-12 and 24.1% YoY growth in 2012-13.

But will the growth momentum continue? It seems in the current fiscal farm exports are likely to remain flat. This is because export growth of items such as rice, cotton and wheat is expected to be flat. As you can see, the farm exports in the first half of 2013-14 have been about half of the exports achieved in full fiscal 2012-13. For farm exports to rise for the full year, there would have to be a significant jump in exports in the second half. And this seems unlikely.

Farm exports to grow slowly in FY14


02:00
 
Monetary policy is not and cannot be the solution to an economy's macro problems. The US government and the Federal Reserve have tried every trick in the book to boost the economy. However, the excess liquidity has hardly served much purpose. Neither the growth rate nor the employment scenario in the US is currently better than it was 3 years back. Moreover, most governments in developed economies, including Japan, seem to be favouring policy tools. However, none has been able to prove its effectiveness in solving growth related problems. Even then the Indian FM continues to pressurize the RBI to lower interest rates. And RBI governor Rajan himself continues to blame the US Fed's policies for India's currency problems. As an article in Fortune correctly points out, no one seems to be interested in the crux of the problem. That reforms and investments in India have come to a virtual standstill is nobody's complaint. And until the government takes adequate steps to kickstart investments, monetary policies will continue to remain ineffective.

02:40
 
In order to contain the fiscal deficit target finance ministry literally arm twisted PSUs for special dividends. It also went ahead to dilute stake in a few of them despite poor market conditions and inappropriate valuations. After PSU's, the latest casualty to fall prey to finance ministry's fiscal jugglery is RBI. Yes, the country's central bank is being maneuvered to meet the fiscal aspirations of the government. In rather uncharacteristic move, the ministry has asked RBI to transfer its surplus ahead of its accounting year to bridge the deficit.

Generally the central bank, after the end of its accounting year, transfers the surplus income to the central government. Last year, it transferred Rs 331 bn to the government. Now RBI's fiscal year ends in June. Hence, latest, the money can be transferred is by August. But the finance ministry wants RBI to pre-pone the payment just to meet its target. It is overwhelming to see the way government is leaving no stone unturned to meet its deficit target. But the means it is resorting to are rather pale. Rather than milking PSU's and RBI, government should have adopted a better expenditure control program. Or for that matter devised means to increase tax revenue. Resorting to fiscal manipulation by delaying expenditures and advancing income receipts will do no good for the future government.

03:20
 
What's your impression of the 2008 Lehman crisis? It was one of the worst crises the world had ever seen in years, right? Well, if an article on zerohedge.com is to be believed, there's something out there that could make even the Lehman crisis look like a small correction! Now, this is a pretty ominous prediction we believe. And if this turns out to be true then we are really in for some tough times. If you haven't guessed by now, the crisis that the article seems to be talking about could come from nowhere else but the People's Republic of China. And the person making the claim is not some fly-by-night financial expert but a former headline-generating analyst, Charlene Chu, at the renowned firm Fitch Ratings.

Chu is of the view that the Chinese banking sector has extended loans worth US$ 14 trillion to US$ 15 trillion in the last five years alone. And therefore there's no way we are not going to have massive problems in China. Well, Chu is not the first person to warn about China in recent times. She joins an illustrious club boasting of members like Jim Chanos, Bill Gross and George Soros, all of whom have their crash-alert flags with respect to China well and truly raised. And it won't be too much of a stretch to imagine that if China manages to go down, it's going to take a lot of the global economy along with it. While we are not saying that this is a disaster just waiting to happen, it makes sense to be well prepared and crash proof our portfolio to some extent by investing in hard assets like gold.

04:00
 
One of the big investing themes for India over the long term is expected to be the consumption story that is likely to unfold. And here, rural consumption is expected to be a big growth driver as opposed to urban markets which are becoming saturated. But the near term scenario is not looking conducive for the rural consumption theme to play out. This is something that FMCG companies have begun to realise. Indeed, despite the slowdown in the Indian economy, consumer companies were hoping for the rural regions to drive overall performance. This was especially since monsoons were quite robust in 2013. But that has not really happened.

And the biggest culprit for this is inflation. While there has been a rise in rural incomes, the same has not been enough in mitigating the crippling impact of inflation. As a result, rural consumers have become cautious with respect to their spending and this has been hurting consumer goods companies. Of course, the extent of slowdown has varied between different categories. Thus, while the food segment is still showing growth, the non-food segment such as home and personal care segments have seen slowdown in demand. There is no doubt that once economic recovery begins to take shape, growth in the rural regions should also pick. When that will happen is anybody's guess though.

04:35
 
In the meanwhile, the Indian stock markets traded well above the dotted line throughout the day. At the time of writing, the BSE-Sensex was trading higher by about 87 points or 0.4%. Stocks from the capital goods and oil and gas spaces were amongst the top gainers, while those from the FMCG and metal sectors were amongst the least preferred. Asian markets ended the day on a firm note with Hong Kong, and Japan up by about 1.5% and 1.8% respectively.

04:55  Today's investing mantra
"All else being equal invest in the company with the fewest color photographs in the annual report."- Peter Lynch
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5 Responses to "Do you have an evergreen portfolio?"

Raghuveer Singh Rathore

Feb 13, 2014

Dear Friends,

If you find my views annoying, please just ignore and leave me to my destiny. There is a old house-hold saying of Elizabethan Time "Sweets are the uses of adversity", which mattered to me greatly, but that seems now just ridiculous to me and nothing else.

Like 

Raghuveer Singh Rathore

Feb 13, 2014

Dear Friends,

I'm afraid I don't know as to what are the stocks which do not deceive even in undesirable circumstances and what can be the key portfolio. Had I could ever come to know then my bought stocks would have been in a win-win situation, which is why I had preferred to accept EM's expert guiding services. Just let me know what can be the best portfoli for me giving 7 to 10 stocks from BSE from small, mid & large caps and I assure you to buy those by selling out the existing ones even booking great losses.

Like (1)

rahul sanwal

Feb 13, 2014

'One should increase allocation to stocks and lower allocation to bonds when the stock markets are significantly overvalued from a historical perspective': This is sureshot remedy for mass destruction of someone's wealth.Bravo 5MinWrapUp,Bravo.

Like (1)

SUNDOS105

Feb 12, 2014

"One should increase allocation to stocks and lower allocation to bonds when the stock markets are significantly overvalued from a historical perspective. "

This text in today's 5 Minute is total Reverse of what EQM recommends !!

I believe it's a typo error ??

With Rgds,

Like (1)

Tukaram Shetty

Feb 12, 2014

In investing, no one method works perfect all the time and there is no tailor made style for any one either.

Best is to hold 50% in equity, 40% in Bonds (Liquid Fund) and 10% in Gold and keep balancing as it grows.

Since Equity market turns volatile due to emotion or over valuation, one has to watch the prime Index PE ratio, as and when the same cross 20, it is better to exit Equity altogether and park in Liquid Fund and re enter Equity when the prime Index reaches below 15.

But one has to be cautious as the timing the market accurately is impossible all the time.

Like (1)
  
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