Wednesday, October 12, 2011

Time to sit on cash?

Volatility is the order of the day today. Markets go up by a few hundred points the day Merkel and Sarkozy meet and make vague promises, when BIg Ben announces US Quantitative Easing with a Twist, when Chidambaram and Pranab grudgingly make up after a meeting with Madam, when inflation data is bad, and on the days it is particularly cloudy. Markets go down by a couple of hundred points when people feel Merkel and Sarkozy's promises are vague, when they feel that Ben's efforts are not yielding any results, when they feel Chidambaram and Pranab are still plotting against each other, when inflation data is bad, and on the days it looks a bit sunny. The whole world seems spooked right now. The sins of the past are reappearing to haunt us; we are afraid in our heart of hearts of the consequences of economic catastrophe that will follow, which we do not want to acknowledge; and everyone is looking at others to see how scared they are. If everyone feels everyone is scared, everyone pulls out money from some assets and puts it into some other assets like US Treasuries; and if everyone feels everyone is confident, everyone pulls out money from US Treasuries and pushes up prices of all other assets by their buying.

At this point in time, it looks there is very little good news on the horizon. Europe is teetering from one promise to another, hoping to stave off the current crisis to some time in the future; the situation will get clearer by end-November. China is not going to get out of its slump in a hurry. The Indian economy seems to be slowing down due to a variety of factors including high inflation, RBI's efforts to fight it by raising interest rates, an ineffective government where paralysis seems to have set in, and of course slowdown of growth across the world. We don't know if the world is going to face a full-blown recession, but it certainly seems like there is going to be prolonged phase of low growth and uncertainty.

So at this point in time, what should be our investment strategy?

Buying stocks in the current situation seems a little risky. A lot of good stocks are available at what appears to be reasonable valuations. However, the benchmark to judge what is a reasonable price is the market itself and the markets seem to be highly uncertain right now. The upside seems to be minimal at this point, and the downside even from current levels could be significant. If you are convinced about any particular stock that you have been tracking for long, or if you are betting on or against specific events like buying stocks that have been affected by the recent mining ban in Karnataka in expectation of the ban not lasting for long, then go ahead and buy. But remember that the broad market is influenced to a high degree on FII and Institutional flows, who are in turn influenced by world trends and who tend to have a follow-the-herd mentality, which magnifies movements either way.

Gold has seen a steady rise in the last few years, with the last couple of years showing very high increase. The current consensus is that given all the uncertainties in the world economy, demand for gold will continue, and there is still scope for significant increase in prices over the next year or two. I would continue buying gold in small quantities.

Silver has dropped steeply in the last couple of months. It now seems to be quoting at attractive levels, and it looks like it may be a good time to buy. Silver is highly volatile, and may even go down further. In case it does, buy more. I am very bullish on the long-term prospects of silver - I think it is good to keep accumulating, especially on declines since the prices are highly volatile. The slowdown in the world economy should keep the prices down for a while, since silver has many industrial uses, but its value as a precious metal (like gold) and the fact that a lot of it gets consumed or used up, should ensure silver's long term value.

Real Estate prices have not dropped in the last few months, in spite of the increasing interest rates and tightening of liquidity by RBI. In fact, in the quarter ended June, real estate prices seem to have firmed up - across India the prices of apartments were twenty percent to forty percent up compared to a year ago. Real Estate prices always lag the economy and stock markets. Prices at these levels may not be sustainable, and the affordability problem of paying EMI's will show effect at some point. Expect real estate prices to decline from now till March.

Having said that, real estate is also about identifying good properties that are set to appreciate due to location, development in the locality, and other factors that could influence demand. If you get the right deal that you are convinced about, you should invest. It is worth looking at Tier 2 cities - in Bangalore check out this new area Budigere that all builders are flocking to.

Cash is good. Interest rates are reasonably high (though of course inflation is high too making real interest rates close to zero) and it is a good idea to park your money in FD's or income funds for a while. Get into cash, and wait for the right opportunities to invest in stocks or in real estate. Good opportunities are bound to come up with all this volatility in the markets.

Whoever said investment is a passive activity? "Invest in SIP's a given amount every month, don't worry about price movements, and in the long run you will emerge the winner!" I don't know if that is the right strategy any more, given this kind of volatility and greater positive correlation among all asset classes. Perhaps we need to get more savvy about the investment options available, keep track of them, and be ready to capitalize on opportunities when they arise.

Happy Investing!

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