'Pay the bank to keep your money safe'! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

'Pay the bank to keep your money safe'! 

A  A  A
In this issue:
» Is Europe headed towards deflation?
» Time to move to long term funds?
» Will foreign stocks now be attractive?
» Will real estate investment trusts be allowed?
» ...and more!

The whole idea of having to pay the bank for keeping your money safe may seem ridiculous! After all, as good savers, Indians have always been incentivized by the banking system to park more and more money in deposits. Since most Indian households do not have enough exposure beyond physical assets like gold and real estate, bank deposits are the most widely held financial asset. That apart, bank deposits in India have been quite lucrative as well. Barring the last 4 years when real interest rates for deposits have been in the negative.

But it turns out that central banks in the West are tactically using the concept of 'negative interest rate' to avert some chronic problems for their economies. Well, the central bank of the US and prior to that of Japan have stuck to near zero lending rates for a while now. However, the European Central Bank (ECB) has gone a step ahead and asked banks in Eurozone to pay it interest of 0.1% to park funds. The logic is to disincentivize banks from hoarding money and instead lend more aggressively. If the banks choose to pass on the negative interest rate to their depositors, the latter might consider riskier investments or spend more.

The ECB and its counterparts in the West believe that risky investments and growth in consumption will help GDP growth. Denmark, which also experimented with negative interest rates in 2012, has already proven that such an assumption is faulty. Yet, the ECB, which has so far resisted the temptation of printing money the US way, has gone ahead with the negative interest rate policy.

One can therefore conclude that the global economy may have to live with very low interest rates much longer than expected. With low interest rates becoming the 'new normal', economies that have high debt will benefit from higher inflation. This is because the value of their borrowings will keep getting lesser. However, this will be at the cost of 'prudent' economies like India when the tendency to save is more than that to borrow.

No doubt the RBI will try to insulate the liquidity scenario in India. Nevertheless, the three primary fallouts of the cheap money policies in the West will be asset bubbles, leveraged balance sheets and currency wars. Asset prices will continue to inflate on the back of cheap money coming in from West. Companies will find it easier to borrow, if not in domestic markets then abroad. And economies will indulge in currency wars to protect their turf.

Keeping these in mind, investors have to be very careful about the kind and price of assets they invest in. It is not just assets like real estate that tend to get inflated with foreign money. But buying companies with dodgy balance sheets at steep prices is also a strict no.

Which asset classes according to you, will investors prefer if global interest rates continue to remain very low? Let us know in the Equitymaster Club or share your comments below.

--- Advertisement ---
Just 1 Reason to Start Investing in Small Caps...

On 15th January, 2009 we picked out one small, relatively unknown stock from the market...

We believed that the business was strong, management was able and that the stock had the potential to create wealth for our subscribers.

So, we recommended it to a select group of investors.

And today, that stock is delivering 1,811% returns!

In other words, it would've turned your Rs 10,000 into Rs 191,000 in just over 5 years.

Now allow us to make one thing extremely clear that not all small caps will deliver this high a return and some might even end up in red!

However, if you can make smart investments and take some calculated risks, our small cap recommendation service could guide you towards such money-multiplying opportunities!

Click here for full details... and act now...

01:36  Chart of the day
The strange world we live in just got stranger. We are strictly talking economics here. Therefore, just as you were thinking that trillion dollar bond buying and near zero interest rates are perhaps the outer limits of the lunacy of western policy makers, well you haven't seen nothing yet. Pat came an announcement just recently that the European Central Bank has officially cut one of its key interest rates so low, its gone in the negative territory. Therefore if the rate is say 3% and you put your deposit in a bank, you'll get Rs 97 back at the end of one year for every Rs 100 that you invest.

Apparently, this is being done to inject life into an economy that as today's chart of the day shows is in the throes of a dangerously low inflation. It's natural for one to ask why not go the US way and indulge in quantitative easing? Well, it appears that this step is illegal as per the charter of the European Central Bank. And therefore it had to resort to this other method of negative interest rates. For us though, it's just the same wine in a new bottle. And it could have the same eventual effect, a dangerously high inflation. Yet another reason to hang on to that yellow metal gold we believe.

Eurozone inflation: Headed towards deflation?

While stock markets have been on a tear for quite some time now, bond markets too seem to buzzing with activity. While interest rates were unchanged in the latest monetary policy review, RBI's dovish policy tone sent Indian Government bonds to almost four month high levels.

As Indian macroeconomic indicators seem to be improving, speculations are high that RBI may go easy on rates. With hopes of easing interest rates and hence lower bond yields, one may come across suggestions to shift from short to medium term and long term funds. However, one must keep in mind that the central bank's focus is on controlling inflation and currency stability. High inflation in India is mainly on account of supply side constraints. The same cannot be removed overnight. Hence, betting on a reversal of interest rate cycle in the near future can be risky. Further, we would suggest that investors should avoid timing interest rates. Instead, it would serve them well to take investing decisions in line with the return requirements and risk appetite.

As the wave of liquidity around the world has increased, there has been growing interest in investing in foreign listed stocks. Given that the stock markets in the US appear over valued in relation to the economic fundamentals there, investors have been looking at other options. With more money in their hands, the risk appetites for better returns have also risen. For instance, there seems to be a lot of interest of late in Chinese and Russian stocks. And now India too is toying with the idea of letting Indians invest abroad. As per an article in the Business Standard, the RBI has hiked the Liberalised Remittance Scheme (LRS) limit to US$ 125,000 from the current US$ 75,000. But Indians should not get lured by the prospects of foreign stocks just because they seem to be the flavour among global investors. Just like they would do for stocks back home, Indian investors will need to do their homework in terms of understanding the businesses and valuations of these companies before they take the decision of investing in them.

Quite a few sectors have been in the doldrums for a while now. With interest rates high, and consumer sentiments not as desired, the real estate sector was one that has been impacted quite a bit. To add to the troubles of developers, liquidity became a problem given that the inventories were piling up and banks were not willing to lend. However, all this is expected to change soon as the much awaited real estate investment trusts or REITs are expected to be allowed in the upcoming budget. But from an investors' perspective, this will definitely be a good opportunity to increase exposure to the real estate segment. Being a large ticket item, property investing is not everyone's cup of tea. And given the strong desire for investing in real estate (especially over the past few years), it is expected that demand for REITs will remain very strong. As reported in Business Standard, REITs could possibly attract funds worth US$ 10 to 15 bn in the first year of operations itself! It is believed that regulators, developers and investors are waiting on the government's stance on the tax treatment of the same. Nevertheless, with the interest rates expected to start coming down in the medium term, the revival in the real estate is mostly on the cards. And as such, participating in the real estate story of India market through REITs would be a good option.

Barring Asia, global markets scaled new peaks in the week gone by. While Indian markets led the way in terms of gains, optimism was clearly visible across the US and Europe. The benchmark S&P 500 index in the US closed the week at an all time high, just shy of the 2,000 points mark. The US markets shrugged off the negative 1% GDP number for the Jan-March quarter as a one-off event caused by adverse weather conditions. The US markets also cheered the latest jobs report which showed that the economy had finally recovered all the jobs lost in the great recession of 2008-2009. However, it must be noted that it has taken a record 77 months for the US economy to recoup all the lost jobs.

In Europe, markets were enthused by the steps taken by the European Central Bank (ECB). In an unprecedented move, the ECB said this week that it would adopt a negative interest rate policy for bank deposits held by it. This means that the ECB will effectively charge banks an interest rate of 0.1% for parking their reserves with it. This has been done with a view to force European banks to lend and boost credit in the European economy which is currently struggling with deflation.

Performance during the week ended Jun 06th, 2014
Data Source: Yahoo Finance, Kitco

04:56  Weekend investing mantra
"Know what you own, and know why you own it" - Peter Lynch
Today being a Saturday, there is no Premium edition being published. But you can always read our most recent issue here...
Recent Articles:
Why Hasn't Warren Buffett Rung the Bell Yet?
August 22, 2017
It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.
How Unique Are the Companies You Invest In?
August 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.

Equitymaster requests your view! Post a comment on "'Pay the bank to keep your money safe'!". Click here!

1 Responses to "'Pay the bank to keep your money safe'!"


Jun 7, 2014

realty sector

Equitymaster requests your view! Post a comment on "'Pay the bank to keep your money safe'!". Click here!


Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407