|»5 Minute Wrap Up by Equitymaster|
On This Day - 8 FEBRUARY 2014
Have Indian savers got a bad deal?
In this issue:
Now like our neighbours in China, Indian households too have had the inherent tendency to save. Even before the concepts of 'saving' and 'investing' were known in economic parlance, Indians accumulated gold. Not just as means of financial security but also to pass down generations. However, Indian savers do not seem to have got their due in terms of return on savings.
The fact is that the trend of investing in financial assets like stocks has been very short lived in India. Several scams, lack of transparency, mis-selling by brokers and mutual funds, corporate frauds etc have eroded whatever little trust Indians had in stock markets post 2002. The risk averse savers then chose to park money in bank fixed deposits. But those who chose to not diversify their investments ended up losing money than generating wealth!
As per the data put forth by the Urjit Patel Committee (RBI), fixed deposits have lagged the returns from gold and real estate for most of last 5 years. Even prior to that fixed deposit returns caught up with that on gold only in FY08. And when compared to consumer inflation, it seems that only gold that has offered any real returns.
Here we would hasten to add that this data is incomplete in the absence of stock market returns being plotted against that on gold. For stocks too have managed to offer substantial inflation adjusted returns over the past 10 years. However, since most Indian savers have given the stock market rally a miss, for them it has been a wealth eroding decade rather than a generating one!
The lesson here is that Indian savers must learn to diversify their investment across asset classes. And while there is a certain degree of risk associated with each asset class, including stocks, realty and gold, they ultimately help keeping the portfolio returns positive. Most importantly, given the long term growth potential of the Indian economy, savers giving the stock markets a miss, may lose out on one of the most lucrative asset classes. A careful selection of investments coupled with appropriate Asset Allocation can help Indian savers undo the damage to their portfolio over the past decade.
Do you think Indians have got their due in terms of return on savings? Let us know your comments or share your views in the Equitymaster Club.
As per an article in Business Week, over the past 15 years, real wages in Japan have dropped 15%. In the 11 months ending November 2013, the rise in wages stood at a measly 0.2%. Real income of households has actually seen a fall in December 2013. Certain Japanese corporates did see a rise in sales and profits. But has that been more a product of a weaker yen or a stronger recovery? The latter seems quite unlikely because there are no hardcore signs visible yet. Overall, it does seem quite unlikely that wages will rise substantially. That means that Japanese will not really be compelled to spend more. And this would once again highlight flaws in government strategies that rely on loose monetary policies to fuel growth.
In any case, there seem to be two sides to the debate of whether gold duties should be curbed. A while ago, RBI governor, Dr Rajan had stated that this measure was not sustainable over the long run. The business daily has reported that the CEO of the World Gold Council has been in discussion with key policy makers, who have indicated that the curbs will be reduced soon, given the recovering economy and the burden of CAD reducing. However, going by the Mr. Chidambaram's latest statement, the Finance Ministry is not considering any proposal to curb gold imports as it is likely to impact the country's CAD position. Going by the words of the FM, it does seem that the country will continue to face issues with gold smuggling for a while now.
In 2013, India was the biggest consumer of silver with estimated imports of about 5,400 tonnes. That's a steep 184% rise from 1,900 tonnes imported in 2012. When there is more political and economic uncertainty, when policymakers fail to protect purchasing power, people tend to flock to precious metals such as gold and silver.
There are strong reasons why demand for silver will continue to rise. As we mentioned above, silver is the preferred precious metal of the rural population that cannot afford to buy gold. Precious metals are integral to cultural customs, especially weddings. Moreover, the rural population does not have access to sophisticated financial products. Given the persistently high inflation, keeping too much cash is also risky. As such, precious metals such as silver are the most obvious choice for them.
In our view, investments in precious metals such as gold and silver should certainly be part of a person's overall asset allocation.
The Indian equity markets ended the week on a negative note. According to the advance estimates released by the Central Statistics Office, Indian economy is expected to grow 4.9% in 2013-14, dragged down by contraction in the manufacturing sector, a first since 1991-92. This would be a consecutive year of sub-five per cent growth. In the previous financial year, gross domestic product (GDP) growth was 4.5%. The Indian markets finally closed the week down by 0.7%.
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