|»5 Minute Wrap Up by Equitymaster|
On This Day - 18 NOVEMBER 2013
No hedge for double digit retail inflation
In this issue:
So how can a common man insulate himself from double digit inflation? Well, there are no quick fix solutions to this. There are hardly any short term financial instruments available to hedge the risk of inflation. Even gold, despite its inflation hedging properties, cannot be relied upon to offer commensurate returns in very short term. More importantly it may not be wise to have a disproportionately high exposure to gold.
The RBI is planning to introduce bonds linked to consumer price inflation for retail investors. The rate of interest on these securities would comprise a fixed rate plus inflation. Interest would be compounded half-yearly and paid cumulatively at redemption. But there is no guarantee whether these bonds will succeed? The RBI had earlier this year launched 10-year inflation-indexed bonds, which were linked to Wholesale Price Index (WPI). But it had failed to attract much interest from investors.
High inflation spells bad news since it means the RBI will hesitate to cut interest rates, a step needed to boost economic growth. Consumers will have to keep paying large chunks of their income every month towards repaying housing loans, even as the cost of food and petrol rises and the prospect of decent salary hikes recede because the economy is struggling. Inflation is also really bad for your retirement planning because your target has to keep getting higher and higher to pay for the same quality of life. In other words, your savings will buy less.
Thus unless the government undertakes bold reforms and solves supply side issues, India might be stuck with high inflation for a significant amount of time. Meanwhile investors may have no tangible solution to park their short term funds in safe, inflation hedging instruments.
First, let's try and understand what PCR means. PCR is a measure that indicates the extent to which the bank has provided against the potentially non recoverable loans (NPAs). A high ratio suggests that additional provisions to be made by the bank in the coming years would be relatively low (if gross non-performing assets do not rise at a faster clip). The RBI wants banks to increase provisions for bad loans. Internationally, provisioning is 70-80% which is far higher than 30-40% in India. The RBI is also planning to frame new rules that would incentivize banks that were proactive in early detection and resolution of NPAs.
-------- 3 Steady Income Small Caps you could Buy today... --------
Small caps are known to create wealth for their investors over long-term...
However, there are a few 'rare' small cap companies which, along with long-term growth potential, also offer regular dividends to their investors.
And we've picked out 3 of these and published full information on them in our Special Report titled, "Steady Income Small Caps".
In fact, one of these 3 companies has paid regular dividends for more than 100 years now!
Interested to know more?
Just Click here for more details... to find out how you can get Instant Access to this report right away...
The zone still has countries laden with debt that have been handed out bailouts after bailouts. Though they have enacted austerity measures in lines with the bailout requirements, however even then their financial situation is precarious. Add to this the high levels of unemployment weak investments and tight credit conditions. As per CNNMoney, the European Central Bank (ECB) has stated that it would take measures including further interest rate cuts to help revive the situation. This means that the money printing exercise of ECB will most likely continue. However if the ECB and the Eurozone takes a cue from US, they would realize that money printing just postpones crisis. It does not resolve it.
What is shocking though is that this has coincided with the S&P 500 making new highs. Therefore, if the old relationship still holds good, either copper or the S&P is set for a huge reversal. Now given how the US equity market is being supported by cheap liquidity with very little economic improvement on the ground, we believe a huge equity market correction awaits us. So rather than copper prices inching up, a bear market in equities looks like a greater possibility. What do you think?
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 (Research Analyst) bearing Registration No. INH000000537 (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, Canada or the European Union countries, 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.
Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407