Two years ago when Standard & Poor’s downgraded US’ rating from AAA to AA+, all hell broke loose. The punch came over the standoff over raising federal debt ceiling that threatened the state to tumble into default.
Two years hence, S&P is proved wrong not because US managed its fiscal debt wisely; it was because other countries mismanaged their economy more than US. Ensuing hoarding brought dollar demand back, pushing EMs (Emerging Markets) into currency crisis. Of all EMs, India has been hit the most.
India faces an imminent downgrade by the international agencies. Though most of the risks have already been factored in the currency and markets, a downgrade will mean drying up of already depleting foreign investments - one source of fund that can rescue India at this point. Government drawing all its cards to stabilise Rupee is quite understandable. It will take some time before the turmoil stabilises and sense takes over. Till then, it seems, India is left on its own.
With no good news around, the present scenario does paint a dreary picture with none of the assets poised to perform in near future. Having battered on all fronts, investor community is starved for a glimpse of a silver line over the sky. Where should investors park their moneyIJ Before credible solutions are suggested, let’s understand that things are bad and is expected to remain so at least till the next general elections are over. We are yet to see a Government that dares to take tough decisions in the weather of elections. Having considered that, let’s analyse some of the silver linings.
A depreciating currency is not good for any economy. But even worse is the currency not finding a stable value. The uncertainty over currency scares investors away even if the valuations are attractive. At such levels, Indian assets are highly attractive but we shall not see investors jumping yet. After the Rupee stabilizes, investors are likely to scramble over to own cheap assets. Which assets they are likely to ownIJ
By the time we will see stability, gold may have broken all records of the past. The lone savior of uncertain times, gold, is not an asset investors will aspire to own. In any case, it will not be cheap either. Gold tend to underperform in good economic conditions; investors will stay away from it. However, metals that have industrial use - silver, copper etc. - shall be poised for rally.
For safe investors, uncertain times are welcome news - especially the tail-end part. As the tide turns, interest rates generally peak offering perfect opportunity for such investors to lock high yield. As a case in point, the 10-year GSec yield is currently treading around 8.6 per cent. In the month of June, it was hovering below7.5 per cent. locking yield at such high rates aligns investments for handsome gain. When better days return, bond prices climb rapidly. When Rupee stabilizes, we shall see significant Foreign Investments here considering bonds are cheaper at present. Safe investors are advised to keep taking positions till the rates start to climb down.
Real Estate is a ‘rate sensitive’ industry. High rates have adverse impact on almost all other industries that serves real estate. The unusual quietness grappling this industry is not likely to become cheerful before elections. But it also means that there are lots of cheaper assets available to be picked. Present scenario is particularly profitable for Foreign Investors who could make two-fold gains. Not only can they invest in assets available at cheaper rates; they need much less foreign currency thanks to the devalued Rupee. Real assets are likely to pick speed as economy stabilizes. It is dvisable to pick assets that are trending unusually cheaper.
One asset class that Indians seem to have forgotten is equity. Rightly so, equities have not delivered since five years. Yet, even during tumultuous times like now, equities continue to play sea-saw, not loosing too much. Equities are different because their performance is irrespective of the state of macro-economy - it may underperform even in a good macro-economic condition. Underperformance of equities has largely been because of lack of initiatives and liquidity issues. Dwindling Industrial Production numbers vindicates the pain industries continue to endure. The optimism of economic revival round the corner has kept the hopes of equities alive even as most Indian stocks are available very cheap. With five years of growth not factored in the valuation, out of all asset classes, equities seems to be the most promising bet for investors as Indian economy stabilizes. The most regulated asset also offers the least entry barrier means that even small investors can start picking the fruits starting now.
It is said, ‘now’ is always a good time to invest and at any give point, some assets will perform. Indian economy may seem to be approaching doomsday, but in a dark tunnel, air always moves towards the light. Rupee may be sliding unrestricted, but it may also open a flood of opportunities just as it did in 1991-92. Question is: are we preparing for doomsday or bright daylightIJ
(The writer is Director, InvestCare, leading wealth advisors. You can reach him at samar.vijay@investcare.in)