Dec 30 2013
Next 12 months will be tough for investors: equity has to perform for any asset class to do well, which in turn will depend on the poll results
The primary reason for this is that such predictions are based on the presumption that the start of a new calendar will reset the economic cycle or change the basic dynamics of an asset class, which is absolutely wrong.
An economic cycle does not follow a calendar and, therefore, there is no point attempting to predict what will happen to an asset class over the next 12 months.
At the same time, it is a good time to take stock of the various factors that have impacted a particular asset class and check whether those factors are likely to see any change, thus altering the dynamics of asset pricing.
In this writeup, we try and make an attempt to see the direction that various asset classes are likely to follow and also look at the issues and events that have the potential of changing their directions.
Our view is that the next 12 months will be extremely tough for investors. If equity as an asset class doesn’t perform, then Indian investors will be left with no other asset class to invest in. Our assumption is that if the economic recovery does take place, equity as an asset class has to see an improvement and other asset classes will have to follow suit.
There are broadly five asset classes that investors can look at when it comes to investing — equity, debt, commodities, real estate and gold.
Over the past three years, equity has been the worst performer among them all; debt has given good returns though it has not been able to beat inflation. Real estate prices have been under pressure for the past two years. Gold has come under pressure over the past 18 months after a dream run and has been moving in a narrow range.
So, what next for all the above? In the case of equity, the outcome of the 2014 general election will be crucial. Over the past few months, the Street has built in some kind of expectation, but it remains to be seen whether that expectation gets fulfilled or not.
If there is a government led by a strong party, then the equity market is going to rejoice and may continue to party, but if there is a third front government, then the equity market is going to be in big trouble. This trouble is not going to be shortlived and may linger on for a longer duration, causing equity to under-perform for months together.
For, India Inc has somehow managed the situation in the last three years, but our companies are not big enough to be able to survive an economic slowdown for, say, another three years, which is very much a possibility if a rag-tag coalition comes to power after the general election.
If the economy does not do well, then real estate as an asset class is surely going to remain under pressure. Realty prices are a function of the health of the economy and they are not going to improve if there is a weak government at the centre.
Whether it is residential or commercial realty, both are linked to the income curve for individuals as well as the corporate sector, and this curve can only move southward or stagnate if the economy remains the way it has been over the past couple of years.
As for commodities, it is a complex issue and no single factor is responsible for the price trends, especially in commodities where the pricing mechanism is transparent. When we use the word ‘transparent’, it is about the price being determined by demand and supply, which is not in control of a single person or a set of people. In the case of agro-commodities, rampant price manipulation is what keeps retail investors away from this basket.
In the case of non-agro commodities, the prices are dependent more on the global economy than domestic factors. So, if there is a recovery in the global economy, metal prices will move. But then as the US dollar will also gain strength with the global recovery, it will lead to a readjustment of prices in dollar terms.
In such a situation, it becomes tough for an ordinary retail investor to make any investment in commodities. And any investment made in a state of confusion can only lead to losses.
In the case of gold, it is important to understand what triggered the price rise in the last eight years. First, the rally in gold price that started in 2003 was due to increasing liquidity in the global market. The second phase of the rally was due to the global financial crisis, as money fled from the US dollar to gold.
It is unlikely that any of the above factors will reappear over the next 12 months. So, there is little chance of any rally in gold price anytime soon.
If the price doesn’t move up, there will be selling pressure on gold. The first sign of that was seen over the past couple of weeks, when reports of large-scale selling by gold ETFs surfaced. These ETFs had been pumping huge amount of money into gold. An asset class needs to keep gaining weight at a certain pace when investments keep flowing in, else the investment flow starts reversing.
In India, the impact of import duty is still keeping gold price high. Already there were some reports last week that suggested that the government might look at reducing this duty, as gold demand has come down over the past three months. Now if and when that happens, domestic gold price should readjust to this fall in duty, which itself would be a good enough reason for investors not to expect any gain in gold investment.
Even if there is no sharp decline in gold price and it remains at the same level, it would mean negative returns 12 months down the line. And at this point of time there is no visible factor that could lead to a rise in gold prices, both globally or locally. Domestic gold price can still rise marginally if there is a sharp decline in the rupee against the US dollar, but even that does not appear to be a possibility at this point of time.
So wait for India to cast its vote and stick with debt papers till then. Do remember the old saying: cash is king.
(The writer is director of independent brokerage Elan Equity Services and consulting editor of Financial Chronicle)