Global fuse, local blues - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
Global fuse, local blues A  A  A
10 JULY 2008

The BSE-30 Index, the one the world watches, is sagging with the weight of the world's problems on its shoulders. Every time the Index tries to achieve some semblance of stability, wham! - it gets hit by some global news flow.

Sample the headlines from Bloomberg on the evening of Wednesday, July 9th: "Stocks in US tumble as S&P Index enters bear market; bank shares slump".

Just in case that headline did not scare away any investor ready to start buying into the US stock markets, here is another one: "Optimism over US stocks falls to 14-year low as Dow enters bear market". Since emotion is (unfortunately) the key driver for investment decisions, the headlines sure do a great job of keeping investors locked up in Dow-proof bunkers.

And for those already invested in the stock and bond markets, the devastating news that "United Capital's Devaney liquidates hedge funds at total loss to investors". The loss, I read, is probably somewhere in the region of USD 600 million (about Rs 2,500 crore). Not a lot, really, if you put it in perspective. The banks and other finance companies have, to date, written down USD 400 billion (yes, billion with a "b"). No one really knows when this will end. Or how many more billions this housing collapse will cost. Some are saying it could be another USD 400 billion. Which means that the total loss will be like writing off the total output of all goods and services generated in India in one year. Imagine all the work done in India in one year is worth nothing. (Even though this Left-led coalition government has not done much this past year, luckily for all of us, India still had some activity.)

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But the end of this long dark tunnel is not yet in sight.
Helicopter Ben - the Chairman of the Federal Reserve - is trapped between disaster and catastrophe.
The decline in the housing market in the US and the subsequent slowing down of the economy is a disaster for sure. The resultant lack of faith in the global financial system - and in the US currency - is a catastrophe.
To rescue the financial companies, Helicopter Ben dropped money wherever it was needed - and that was everywhere.
His act of dropping money from a helicopter in rescue operations led to a weak US currency and to higher inflation.
The truth is that the lifestyles of most Americans have been artificially propped up - they are living beyond their means. Now comes crunch time: Helicopter Ben must "choose his choice".
Let the roof fall on his head (if he does nothing), or let the flood of money created by his helicopter rescues cause prices of everything to spiral.
Paper money will lose its value.
Death from fire or death by flood.
But death it is.

And just in case Helicopter Ben does not worry us, the trigger-happy folks around us should. We always have our fingers on the trigger, say the Iranians, as they prepare for an invasion. And we will hit out at US interests if we are attacked. Israel, meanwhile, also conducts war games.

Iran is building nuclear capability. Israel wishes to stop it. One third of the oil exports from the Middle East flow through the Straits of Hormuz. If you knock out our nuclear facilities, say the Iranians, we will set fire to the Straits of Hormuz. Not good for oil prices, not good for India.

But while Israel and Iran are threatening to pull triggers, the shots have been fired in India. The government is pushing ahead with the India-US nuclear deal. No one is quite sure what the precise benefit of this deal is, but it sure has created a lot of fire.

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So the markets continue to be blown around by global cues and by local events. Some financial, some political, some religious. At the end of the day this changes the environment in which the companies operate. This affects the ability of companies to make profits. This affects their share prices. The Index has a reason to move around and not stay constant - that is true. But the rate of change seems exaggerated. This exaggeration is caused by greed and fear. The fear of seeing the government topple has helped bring the markets down. Yet, maybe it is the best thing that could have happened. Maybe, without the Left to stop it, more reforms will happen under another government. And that means stock markets should be rising, not falling. Maybe.

Having said that, what if the Strait of Hormaz is set on fire. That would be a disaster - not only for stock markets but for how we live on a daily basis. Oil and energy - which we are so dependent on - will be in short supply. And really expensive.

We don't know which person in which part of the world is likely to pull which trigger. Or which central banker is going to fly around in a helicopter to put out the fires. What we do know is that - at all times - it makes sense to keep a portion of your savings aside for investments. And the investments must be in a variety of instruments and assets. For example, this year, the Quantum Liquid Fund has given a return of +4.2% (as of June 30) while the Quantum Long Term Equity Fund has given a loss of (-)31.8%. Gold meanwhile has given a return of +21.3%. Much as many of my peers would have you believe there is no magic to investing. A lot of it is common sense - and a discipline to stick to common sense. But, like they say, the strange thing about "common" sense is that it is most "uncommon".

Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold Fund
Quantum Liquid Fund
Why you should own it: An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 15% 5%

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Note: Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.

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