Should we write the obituary for stock investing? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should we write the obituary for stock investing? 

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In this issue:
» This is not the beginning of global food crisis
» Are Indian metro rail projects disasters in the making?
» The staggering return opportunity from Myanmar
» Why 'Swiss Franc' is the new safe haven in currencies..
» ...and more!

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In how many years do you plan to retire? Pardon us for asking this. But the likelihood of investors being shocked at their retirement corpus, when it is time to hang up their shoes, is going up by the day. An individual's retirement corpus is linked to 3 things. Rate of savings, return on investments and inflation. After several economic shocks and financial crisis, the importance of savings has dawned upon most parts of the world. Even the free spending Americans are now focused on saving. Thankfully Indians were always good at it! But savings alone cannot solve the problem. The surplus corpus needs to be invested wisely for the long term. Here again one needs to ensure that the returns are not just safe but exceed the potential sustainable inflation rate. Now, it is the latter that is causing the maximum trouble. A high inflation rate that is here to stay threatens the real (inflation adjusted) returns. As a result more savers may have to work for much longer than anticipated earlier, in order to retire comfortably.

Now any investment planner will tell you that a long term investment portfolio needs to have a fair share of equities. For while bonds offer safety and gold offers some inflation hedge, it is equities that have the potential to fetch the maximum real returns. However, with corporate profits world over not showing very promising prospects, there are doubts if the days of stock investing are numbered. As per Bill Gross, chief of bond giant PIMCO, it is time we write the obituary for stock investing, as we know it. His prime contention is that the rise in inflation could potentially outstrip returns from stocks. And therefore there will be little incentive for investors to take the risk of investing in equities.

We must add a disclaimer here that Gross' views largely refer to investment returns from US stocks. Further, given the rate at which the US Fed is easing liquidity, inflation is but a crisis in the making in the West. Indian stock markets fortunately offer a whole host of companies that are slated to offer very reasonable real returns for a very long time to come. As long as investors keep their return expectations realistic, investing in equities for the longer term is not a decision that Indians will regret. Also inflation is not a new threat for Indian companies. The Reserve Bank of India (RBI) has kept a tight leash on liquidity. However, companies too are doing their bit in containing costs to keep profits consistent.

Hence we believe that with age and increasing income levels on their side, Indians must do their best in insulating their retirement corpus against inflation. The only way to do it is investing in safe stocks at attractive valuations for the long term.

Do you think, Indian companies will be able to offer healthy inflation adjusted returns in the long term? Let us know your comments or post them on our Facebook page / Google+ page.

01:30  Chart of the day
Corporate salary growth has come under much debate as companies try their best to cut costs and tide over the slowdown. Even bellwethers like Infosys, earlier known for their generous compensation policies, have had to free hikes this year. Banks and financial institutions too have kept up with their Wall Street peers in keeping bonus payouts under check. On the other hand, rural employment schemes have kept the pay rises relatively better for the populace in hinterlands. As seen in today's chart, rise in rural wages have outperformed corporate salary growth during most quarters over the past 3 years.

Source: RBI Macroeconomic Review

Well known macro investor Jeremy Grantham, who's perhaps been a bear all his life, is out with his latest quarterly letter. And true to his reputation, it does not paint a really good picture. Choosing to focus upon the all important issue of food scarcity, Grantham argues that a chronic global food crisis is already into its sixth year. And what more, the crisis is unlikely to go away for many more decades to come.

It is true that global food production will have to increase by 60% to 100% by the year 2050. Just so that the ever increasing global population can be properly fed. However, as per Grantham, even the 60% target looks highly optimistic. This is because a lot of factors like falling grain productivity, water problems, bad farming practices and increased weather instability are coming in the way of significantly higher food production. In fact, even if we are able to produce enough food, the cost of it will be very high. And thus, a huge number of people will not be able to afford the same. Coming from someone like Grantham, these warnings may not be taken lightly.

But what is equally true is the fact that the importance of this issue is not lost on policymakers and entrepreneurs across the globe. Work is underway on a lot of technologies that could make food security, even in the distant future, an attainable task. We don't know for sure what these technologies are or whether they will succeed. But if history is any guide, the ever so inventive human has always managed to find a way out in this world of limited resources. And it is difficult to imagine that this time is going to be any different.

As major urban cities expand, commuting by the metro and subways has become very important. Subways have many advantages. These include large-volume transport capacity, high efficiency levels and low energy consumption. They can also save land and boost economic development along the line. Plus, they are also effective in terms of reducing traffic congestion. But if one looks at the economics of this, the picture is not very encouraging. Take the case of China. Planners there have warned that construction and maintenance of metro rail turned out to be costlier than space travel. Indeed, Firstpost reports that China has spent about US$ 6.1 billion in the last 20 years on its manned space programme. But, if that same amount is diverted towards the metro rail, it would be barely enough to build 78 km of subway system. Big cities such as Beijing and China are grappling to cover costs. This is despite the metro systems in both being among the busiest in the world. This is because income from ticket sales and advertising covers its daily operating costs, but is not enough to pay for maintenance or the interest on loans taken to fund these projects. Obviously, this means that smaller cities will find it difficult to harbour hopes of metro rail network when their bigger counterparts are struggling to keep head above water.

The world currency markets are going topsy-turvy. And it is not only the troubled economies that are witnessing wide swings in their currencies. Even robust economies are bearing the brunt of the ongoing global instability. Take the case of Switzerland. It is one of the few European economies whose economic fundamentals remain stable and strong. In fact, owing to its fundamental strength, the Swiss franc has become a safe haven for global investors. But this has been a big worry for the Swiss National Bank (SNB). Huge demand for the Swiss franc tends to push the currency rate higher.

Why should a rising currency be a matter of worry for the economy? In India's case, a rising rupee would solve a lot of our problems. But this is because we are a net importing country. On the other hand, Switzerland is an export-oriented country. A rise in its currency tends to severely affect its exports and the economy, at large. To curb the currency from rising too much, the SNB has been forced to buy billions of Euros. Its foreign currency reserves have shot up 40% this year to about US$ 375 bn. This makes it the sixth largest holder of foreign exchange. What is a matter of concern is that the proportion of Euros has ballooned significantly. Common sense suggests that it's risky and undesirable to hold a currency whose existence is under threat. So the SNB has been trying to offload the excess Euros and switch to other currencies. This move, in turn has been partly responsible for the huge upswings in the Swedish Krona and the Australian dollar. The currency war is likely to persist until the major currencies stabilise and solve their sovereign debt problems.

If something is at its rock bottom then it can only head one way. And that is upwards. This seems to be the argument presented by leading investor, Jim Rogers. The argument is in favour of Myanmar. As per Mr Rogers, Myanmar presents an enormous investment opportunity with staggering returns. The country has suffered a state of poverty since it decided to 'close up' to the rest of the world. As a result, there has been a low level of penetration of services and industry. But now the government is opening up and working out reforms. To add to this Myanmar has a huge workforce which is disciplined, educated and enthusiastic. Together, these would yield enormous returns in the future in his opinion. We hope that Mr Rogers enthusiasm and optimism pays off. But a large part of his faith in the country rests on the government reforms. For Mr Rogers' sake we hope they take a page out of their neighbor China's book and not India's when it comes to executing this point.

In what has been a volatile day of trade, the indices in Indian equity markets oscillated to either side of yesterday's close for most part of the session. The BSE Sensex was trading higher by around 12 points at the time of writing. Commodity and energy stocks were under the maximum pressure. Most Asian indices closed lower today with Europe opened on a positive note.

04:50  Today's investing mantra
"There is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us. None of us likes to admit to himself that he has been wrong. If we have made a mistake in buying a stock but can sell the stock at a small profit, we have somehow lost any sense of having been foolish. On the other hand, if we sell at a small loss, we are quite unhappy about the whole matter. This reaction, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process" - Philip A. Fisher
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2 Responses to "Should we write the obituary for stock investing?"


Aug 2, 2012

@G Vijayaraghavan, when you think about it, Inflation is also legalized theft. Hence, earning below inflation returns on your savings virtually ensures that your purchasing power is stolen from you. On top of that, if you have to pay 30% tax on assured income like FD Interest, its salt rubbed on wounds.
I agree that stock investing in today's times is tough, but its not due to promoter integrity or competency alone, there have always been crooked and stupid promoters, even 40 years ago. The difference in today's times is that the macro economic situation and regulatory framework is the biggest risk to stock investing.
If inflation becomes a big problem in the West, it will become an even bigger problem in India. Regardless of whether there are companies that can retain their pricing power in an inflationary economy or not, it goes without a doubt that high inflation is corrosive to everything in the economy and has the potential to spark civil unrest by transferring real wealth from one section of society to another without anything happening in return.


G Vijayaraghavan

Aug 1, 2012

Let us review the gains made by all industrialists who got rich by insider trading and start putting those guilty of it in jail for 40 years or more. Then people like me will believe that it is safe to invest in stocks. Right now, a low and safe return by way of bank deposits is better than losing most of your money to the organised and legal theft which is what the Indian stock market is today.

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