Accretus Solutions

As a follow on post to the ‘ Are we heading towards Hyperinflation’ , the recent data/events and actions re-affirm a firm belief that it is time to allocate commodities to one’s portfolio. Let me put together the pointers that has led us to this belief:

1. The U.S. will continue to do ‘quantitative easing’ to ease the credit crunch..Unfortunately, it has not yielded meaningful results till date. According to Meredith Whitney,the Small and Medium Enterprsises in U.S. [ which contribute to over one-third of the GDP] till date have been increasingly denied access to credit.The SMEs are the prime engines of innovation and employment revivals[represents 50% of the nation's workforce]. Lack of credit leads to lay offs and closure of businesses.

2. The U.S. Government’s intent to stimulate the economy through more consumption[ like cash for clunkers program, etc] would not work, since the consumers are paying off their debt and saving more.  The notion that  over 70% of GDP contribution would still come  through consumption seems to be history.

3. Dollar[due to zero interest rate policy] has now replaced the yen as the ‘carry trade’ for investors, fuelling asset bubbles across emerging markets.

4. Recent data put out by IMF indicates that Fiscal Stimulus doesn’t work in reviving the economy, when the fiscal deficit is beyond 60% of GDP. The U.S. has already reached that level.

5. When all mechanisms to revive the economy fails, drastic depreciation of the currency would be the only option for U.S. to revive its economy. This would temporarily bring down the soaring un-employment rates and push consumer prices upwards[deflation to inflation].

Recent Report published by David Rosenberg on The case for commodities captures the above premise very well and also suggests how investors now should re-align their portfolios.

It clearly raises a strong case for commodities. As history shows, during high inflation its the commodities and precious metals which not only acts a hedge to our portfolios but performs better.

What does all this mean to the Indian Investor?  Our country and other nations across the world has very high correlation to U.S. and hence what happens there does impact us. For eg. 16% of world GDP consumption is still driven by U.S. investors.

To sum up, it would be prudent to  trim equity portfolios , add commodities & precious metals [with a 20-25% exposure] and  increase fixed income allocation  in your portfolio.

After all, Portfolio Diversification and Dynamic Asset Allocation is the way to preserving and managing our wealth in these uncertain times.

In the last one quarter the data coming out of U.S. clearly indicates the raising unemployment rates and american citizens after a long time starting to save! Yes..in fact the previous quarter savings have been 5%.. Clearly this does not indicate green shoots..more like brown weeds..or rather brown manure as Nouriel Roubini puts it.. His latest article clearly highlights the fact that its going to take longer for the U.S. to recover from the recession..

A survey conducted in 2001 by International Society of Certified Employee Benefits Specialists, U.S. indicates that 96% of the respondents agreed that “Workers want financial planning and advice” and they often turn to their workplace for it.
Employers also increasingly recognize that many employees lack the most basic money management skills, and that the resulting financial problems they experience affect their productivity and performance.
Though the survey is dated and is U.S. centric, one would agree that due to twin effects of increasing financial linkages between our country with other emerging & developed markets along with the excess leverage taken by individuals in the last 4 years, has brought in lot of financial distress and wealth erosion among individuals.
Some other insights on studies undertaken recently are :
1. An employee’s financial stress and anxiety can have a negative impact on your bottom line. It’s estimated that employers pay $2,000 per employee per year for lost productivity.
Source :  2004 Occupational and Environmental Medicine Journal, New Cornell University Study
2. 4 hours of lost productivity due to financial concerns
Source:  Garman, E. T., Leech, I. E. & Grable, J. E. (1996). The negative impact of employee poor personal   financial behaviors on employers . Financial Counseling and Planning, 7,157-168.

Most corporations in the developed world offer the EAP benefits to their employees which helps improve productivity and reduce attrition levels.

In India specifically, the time has come to introduce financial planning and advice under employee assistance programs for the following reasons;
1. Aspirational levels have lead to leverage among individuals, which has gone up thrice from 5% of GDP in 2003 to almost 15% of GDP
2. Global slowdown has brought in job losses across sectors and fear of job loss specifically in certain sectors which are export dependent..
3. In metros and tier 1/ tier 2 cities, the young urban population have bet on their future cash flows and leveraged far more than they could afford.
4. The bull run that started from 2004 and ended in early 2008 brought in its wake easy money and in the process destroyed the wealth creation opportunities that could have been achieved in a sustained and consistent manner.
5. The nuclear family concept has come of its age which has changed the social fabric in the country and emotional support systems [for the migrant white collar workforce]are either nil or marginal.
6. Due to financial stress, health and family issues takes center stage thereby reducing productivity levels of employees and higher attrition levels,specifically in sectors like I.T. and ITES.

It is time that Indian corporations take a pro-active approach to assist employees in the most crucial sphere of their personal lives. Like the statistics and studies bear out, its a win-win situation for both employers and employees!.

Post January 2008 and more specifically September 2008, many investors were left to wonder whether one could avoid asset bubbles.

We believe there is a way out. Personal Financial Planning is it.

Yes! Focusing on ‘goals’ rather than ‘returns’ could help us avoid asset bubbles.
This in turn detaches the investors from the ‘greed and fear’ experiences in the market.

An interesting study done by Dr Conrad S Ciccotello of University of Atlanta, Georgia bears some very interesting observations:

1. Returns estimation expected by clients varied from overly optimistic during bull runs and overly pessimistic during bear phases.
2. How could one avoid the herd mentality?
3. Goal setting as part of the financial planning process holds the key to avoiding asset bubbles.

Most importantly, the study showed that people would always want to achieve their goals.

At the end of last year,while I was in Sharekhan,our team embarked on an unique project called ‘India Market Chronicle’.

The project had twin objectives :
1. Will stocks deliver positive returns in the long run?
2. Will Portfolio Diversification along with Portfolio Re-balancing or Dynamic Asset Allocation deliver consistent returns as well as minimize the downside risks to the Portfolio.

India Market Chronicle chart [based on back testing data of 26 years] threw up some surprising and interesting results.

Two clear conclusions emerged out of the project :

1. In the long run, equities could still deliver negative real returns.
2. Portfolio Diversification and Dynamic Asset Allocation could indeed minimize downside risks and provide consistent returns.

Circa Sep 2008

Lehman Brothers collapses..Credit markets freeze.. Equity markets crash.. Commodities Markets go on a tail spin..

Central Banks start getting their act together in a coordinated effort to revive the credit market..

Circa May 2009

Quantitative Easing led by the Fed  and followed by other Central Banks have brought down the interest rates to near zero..

All major asset classes and commodities have risen dramatically since March 09..

While the U.S. Government, by using the extreme measure of monetary policy of ‘quantitative easing’  is hoping that the credit flows would lead to economic recovery, in the medium term it is setting itself up to ‘hyperinflation’ due to the dollar that would start losing its value.

In this context it is interesting to note that the famous author of ‘Black Swan’ , Mr Nassim Nicholas Taleb and his collaborator who manages and runs a hedge fund have launched a new fund betting on ‘hyperinflation’.

There is a great probability that we would see higher inflation in India too..

The financial linkages have become stronger across the world in the last 4 years..

How should we re-align our  portfolios to prepare us for this new scenario that would hit us in the next 2-3 years..

Watch out for the next post which would focus exclusively on this theme..

It has taken a while for me to compile this concluding part.. while the Sensex is almost blasting its way to 19K!..

After culling through lot of data and research reports..its pretty clear that our markets are probably going to scale newer heights in the next 12-18 months or so..

‘Liquidity’ is the buzzword going around the markets..
Will the Fed cut rates again [on Oct 30, 2007] which would lead to more fund flows into emerging markets?

Meanwhile..some interesting theories have started floating around in the last 3 weeks:
1. Decoupling of Emerging Markets..
2. Low Correlation levels of India with other markets..
3. Is History repeating itself and will the next bubble be in emerging markets?
4. Will the central bankers get autonomy to take decisions without being influenced by the government?

On the home front the political fiasco has been merely postponed..
If one were to go by the latest news, there probably wouldn’t be a mid term polls after all..
this will further get ratified on 22nd October 2007 when the UPA meets once again..The stability factor could be decisive in bringing more fund flows into the country for the next 12-18 months..

The earnings season have kick started on a good note [In line results for Infosys and HDFC bank beating the street expectations] and it does look like there will be some decent number of positive surprises rather than negatives..

What is worrisome with ‘liquidity’ in the Indian context is.. the companies seem to be getting into unrelated diversifications[eg constructions cos getting into telecom, almost all large business houses getting into retail]..
One wishes its not the repeat of the 1990s..

What should you and I do as a long term investor in the next 12-18 months? Like I said before in the previous post [Sensex at 20K].. Re-balance/Churn selectively equity portfolios by booking significant profits at higher levels, buy Gold [ a very interesting piece followed by advice at the end of the article by the noted columnist Anantha Nageswaran]and buy/accumulate into businesses[at dips] that one belives strongly will deliver decent returns over a period of time.. One should also look at diversifying into international asset classes after due dilligence and research..now that the RBI has increased the investment cap to $ 200,000 per individual..
For first time investors in equity markets.. its better to participate in the equity markets through the systematic plan route in equity diversified/index/etf mutual funds..
For those who want to ride the momentum and make a killing on their short term portfolio allocation..may god bless!!

While we are contemplating on getting on to the bandwagon of the great chase ..I am reminded of Charles Mackay’s ” Men, it has been well said, think in herds ; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one!”

Kiran from India wanted to know if its a good idea now to invest in DSP ML T.I.G.E.R Equity Diversified Fund..

Kiran..before I answer to your question on whether to invest in this fund or not, would like to give a little background about the fund..

Background :
Tiger in short for The Infrastructure , Growth and Economic Reforms Fund was launched with much fan fare in June 2004, by DSP Merrill Lynch just ahead of the General Elections of 2004, when the markets were shining and NDA launched the India Shining Campaign.
The fund bets and believes on the growth oriented infrastructure and economic reforms story.
Even though the NPA government was defeated and UPA came to power, it believed the reforms are here to stay.

Tiger Fund pre-dominantly focuses on infrastructure related stories where it has the maximum exposure..
It continues to believe that the potential for growth is enormous in that sector in the coming years..
Tiger Fund is one of the best performing funds in the equity diversified fund category with CPR1 ratings by CRISIL. Value Research Online has voted it as a 5 star fund category. The fund is well diversified and has a portfolio of 64 stocks and 2 derivative positions.
One of the interesting fact is that it has almost 12.5% in cash and cash equivalents which would come in handy during market downturns to capitalize on buying opportunities. This is the portfolio update as on 31 Aug 2007. The AUM of the fund stands at on Aug 31 2007 is Rs.2241 crores.

The fund has consistently out- performed the benchmark category of BSE 100 by more than 10% year on year.
Infact, it has exceptionally done well in the last one year where its returns are 52% and the BSE 100 gave returns of 32.42%..

Observations : As you might know, mutual funds are long term wealth creators. It is advisable to stay put in these funds for atleast 3 years if not 5 years.
With India story intact, foreign and domestic fund flows rushing in, thanks to the FED funds rate cut and the rupee appreciation, the market trends are extremely bullish.
In the short to medium term, the volatility in the markets will be very ferocious.. Factors like high oil prices, political crisis could play spoil sport in the short to medium term..

While at the same time, the global trends do point to an impending financial crisis, we seem to be fairly protected from the US recessionary trends/slowdown due to our domestic consumption story and demographic dividend which plays to our advantage. Of course, we have to address two key bigger issues like infrastructure and employability issues , but the process of reforms/development is irreversible…

We still need to wait and watch as to whether Asia, specifically India will de-couple from U.S. It does look like it will happen sooner or later..

Factoring all these, my recommendation for Kiran would be to invest in the fund, provided he has a clear time horizon of minimum 3-5 years and opts to go for systematic investment plan, which would ensure that the rupee cost averaging and power of compounding would generate extra kicker to his returns.

The Fed has once again [50:50 Fed Funds rate cut and Discount Rate cut] unleashed the animal frenzy in the markets..
The rupee closed yesterday at 39.88 per dollar..
The currency has risen 11% since January 2007!

Indian markets are going to witness a never before fund flows from multiple segments..
In the last two days, FII inflows into the equity market stood at $608 million. Till date the FII inflows for this calendar year have already crossed $ 10 billion..
Raining wealth?!

Let me try and list out broadly the segments who could possibly contribute to the stratospheric highs of Sensex reaching 20k :
1. The existing ‘waiting on the side lines’ money from FIIs, Domestic Institutions and Retail/HNI segments.
2. The first time retail house hold investors who would enter the market through direct/Mutual Funds/ULIPS. The retail participation by house holds for FY 06-07 was a mere 6% of their savings into equity markets. This pie could significantly go up at the cost of the most dominant savings mode – Bank Fixed Deposits which is currently at 47%.
2. More and more hedge funds will enter the ‘arbitrage game play’ due to the return of the yen carry trade in a bigger manner [since BOJ went on the 'hold' mode with respect to interest rates]..
3. Newer Private Equity funds will find its way into the domestic markets..
4. The latest animal to the party, ‘Sovereign Wealth Funds’ would also try to wriggle its way into the market.
5. New Retail Investors from U.S. and other the developed world will join the bandwagon via India focused oversees Mutual Funds .
6. Last but not the least.. the NRIs pre-dominantly from the Middle East and other parts of the world will rush in as well..

In retrospect, at the start of the year 2007, I came across a very interesting column by a Neo Wave Technical Analyst who goes by the name Milind Karandikar whose column appeared on January 8, 2007 in the Business Standard’s ‘Smart Investor’ section.

According to Karandikar, “We are in the 5th wave as per the New Wave Theory.Wave 5 usually covers 100 % to 161.8% of the price action of Waves 1 and 3 combined. On a logarithmic scale this calculation sets a target of 20,000 plus for the Sensex. And that could happen in the year 2007 itself. Those who cannot over come the general feeling of nervousness would miss a life time investment opportunity, that the year 2007 presents. My advice to small investors is to over come this fear of heights and invest. They should take this opportunity; else the other wise men will take it away”.

Well.. there definitely seems to be a case for the build-up for the Sensex to hit 20,000 soon..

Hey..Should you and I join this party at all?
I am thinking..
Wait till I re-visit this subject[in the next few days] with more data and research and pen down my thoughts again ..
Meanwhile.. If you can’t wait to call your broker now, remember Jim Rogers latest quote ” Every time the Fed turns around to save its Wall Street friends it makes the situation worse. The dollar’s going to collapse, the bond market’s going to collapse, there will be a lot of problems in the U.S.”

Yes! Recent data released by Life Insurance Council clearly indicates that the 16 Life Insurance companies in India are moving the Indian Equity market. Literally.
While the FIIs pumped in around $ 8 billion in Indian equities in FY 2006, the Life Insurance companies invested around $ 35 billion worth of equities in FY 06-07.
What is interesting in this finding is that the domestic equity mutual funds chipped in with just about $ 2 billion.
Bulk of the contribution[to the tune of 75%] in the life insurance segment was thanks to the behemoth, Life Insurance Corporation of India.The $ 26 billion investments by LIC indicates that no longer the FIIs flows could have significant impact in the domestic equities market.
Case in point – FII outflows in August 2007 was approximately to the tune of $ 2 billion. But sensex and nifty still ended the month positive with almost 3% returns.
Next to Hang Seng we have been better performers in the last two months in comparison with other emerging markets and developed markets.
The increasing participation by retail investors in equity market through Unit Linked Products or ULIPS floated by the Life Insurance Companies could have helped stemmed the tide in the domestic equity markets while FIIs were pulling out funds, specifically hedge funds due to redemption pressures.

This sure is a tipping point for our Indian Markets and reversal of roles as to who supersedes the equity market flows in the Country.
Of course, one needs to watch whether this is sustainable, because if and when our markets do get bearish[due to global factors and political factors] in the near term, our retail investors again could develop cold feet to equity investing.
The last time around we saw huge participation of domestic house holds investing in capital markets, was when Harshad Mehta moved the market in 1990s!
And the rest is history…

We hope this time around its different..
May we raise a toast to the coming of age of the Indian Investor!