The asset classes to hold on to in absence of 'easy money'
(Aug 7, 2015)
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In this issue:
» Assets that will keep your portfolio safe
» A megatrend in healthcare in the offing?
» The impact of EPFO's investment in equities
» ...and more!
Next month may go down in the history of financial markets as the end of an era. The era is nothing but that of easy money.
If you who were amongst those following global market cues back in 2001, recalling Fed chief Alan Greenspan's reaction to the September 11 attacks will come easy. The Fed began its attempt to boost the economy by offering cheap funds 14 years back. And the attempts have not ceased yet. Over the last decade and half, the Fed's tap of easy money flow did anything but boost the economy. Even as asset bubbles blew up and burst, successive Fed chiefs kept up their resolve to keep printing money.
But as with most good times, the US' money printing presses recently came to a halt. And as shortly as September 2015, Fed chief Janet Yellen may even tinker the rates upwards.
But the easy money ponzi schemes will hardly end there. After the US and Europe, central banks in China and Japan will take up the mantle of keeping the printing presses of easy money running. Why so? Well for that I would recommend that you read Vivek Kaul's trilogy Easy Money to understand how governments across the world have run ponzi schemes since the early days of paper money. That should give you a good sense of how asset prices have been manipulated, not over years and decades, but over centuries.
So will Greenspan and his successors at the US Fed have the last laugh?
Well, the investors in the US will probably be happy to see their stock portfolio move higher. At least temporarily. And asset classes like stocks and real estate in emerging markets could also continue to benefit from this largesse. Again temporarily.
But as Bill Bonner says, "You can fool all of the people some of the time. Some of the people all of the time. And most of the people once in a while. You can obstruct price discovery and you can disguise and distort the real value of things. But Mr. Market will get even some day. He always does."
As an investor in Indian stocks you do not have to rely on the proactiveness of Mr Market to set things right. No doubt mispriced assets will see their values reverse to the mean over time. But you would be wiser guarding your portfolio with the safest assets that can not only minimize your losses but also hedge against the repercussions of absence of easy money.
Holding on to only the safest stocks and some gold in your portfolio would be the best way to avert unwanted surprises.
Which asset classes will be the safest to hold on to according to you as when global interest rates move upwards? Let us know your comments or share your views in the Equitymaster Club.
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Over the last few years, India has become a preferred destination for medical treatments, primarily due to the cost advantage. The healthcare costs here may be cheaper than most other parts of the world. However, when compared on the basis of purchasing power parity, medical care has been getting prohibitively costly.
Average hospitalisation cost grew at 10% CAGR in last 10 years
As seen in today's chart, hospitalization costs in both urban and rural areas have risen at over 10% per annum in the past decade. Thus the empirical evidence highlights, that there is an increasing demand for healthcare services in the country. However, affordability remains a serious issue at least for the Indian citizens.
The healthcare market in India is currently dominated largely by large private players. Most of which offer good quality medical facilities at premium prices. There are very few entities offering good quality healthcare at affordable rates. The government is already looking for options to make healthcare affordable accessible and increase its presence, in the country. And hence the Megatrend in affordable healthcare services is in the offing.
No wonder, a group of PE investors are already showing interest in online healthcare ventures. The online service providers help in bridging the needs of patients and providing options for doctors, cheaper medication options and so on. Eventually we may find several such companies exploring the option of making the healthcare business in India more progressive and affordable. Definitely a trend to watch out for.
After a long wait, domestic pension money (Indian EPFO funds) will be making its way into the Indian stock markets this fiscal. As per an article on Reuters, the Employees' Provident Fund Organisation (EPFO) will be investing Rs 50 bn i.e. around US$ 800 m, during this fiscal through exchange traded funds.
EPFO has around Rs 8.5 trillion under management, most of it invested in government bonds. Of this, around 5% of the corpus will be invested in the equity markets. Now this is certainly good news. It will allow more Indian long-term money to be invested in equities and at the same time earn better returns on the EPF.
This sizeable money entering the Indian markets, will certainly stoke the valuations of Indian indices. But investors should not read too much into the short term spurt. No doubt long term pension money that too from domestic funds is much desired and a long term positive. But for investors it would be wise, not to get driven by such temporary surge and invest only at appropriate valuations.
The Indian stock markets opened the day on a flattish note and have been hovering around the dotted line. At the time of writing, the BSE-Sensex was trading higher by around 20 points, while NSE-Nifty was up by 2 points. Major sectoral indices were trading in the green with oil and gas and auto stocks leading the pack of gainers. Both the midcap and smallcap indices were in demand today, with the BSE-Midcap and BSE-Smallcap indices up by about 0.2% and 0.48% respectively.
"I make a guarantee the first day of class every year that if you're good at valuing companies, the market will agree with you. I just don't guarantee when. It could be a couple of weeks or it could be two to three years." - Joel Greenblatt.
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