Author: shyam

Risk taking is inherently failure prone. Otherwise, it would be called sure-thing taking. –Jim McMahon (American Football Player)

The most favored assets for the Indian middle class remains gold and real-estate. And this is not a post-global-financial-crisis story, it has remained so since my grandmother’s time. The oft cited reasons are that these are “safe” i.e.: they will not depreciate in value. And evidence over the past 20 years suggests that it has indeed been so. But will it be forever into the future?

So lets see what happened over the last few years:

Devaluation: in 1980 1 USD bought about 8 INR. Now it buys about 50 INR.

The stock market had its share of controversies, roller-coasters and outright fraud.

Increasing urbanization post 1990 lead to a real estate boom in the cities.

And Gold went parabolic.

So basically, if you ask your mom, wife or uncle, the underlying belief would be that these trends are going to continue forever.

Please allow me to make a counter-point: What is the bid-offer for all these “investments”? For gold ornaments it about 20% (try selling a bunch of old jewelry). For real estate (land) it’s a 3-6 month process and trying to sell a 5 year old residential flat might give you a heart attack.

Stocks and ETFs, on the other hand, are liquid. If you want to buy gold as part of an investment portfolio, buy GOLDBEES or if you want to buy real estate as an investment, buy a basket of RE stocks. I am not advocating an “either/or” scenario. Its just that conventional wisdom has such a strong recency bias that you need to verify why it so by taking a step back every once in a while.

What a January! One of the few in recent memory that ended up. NIFTY up a solid 11.2%, the Jr. NIFTY up 17% and Banks outperformed coming in at 25%

Major drivers were Greece, stabilizing inflation and RBI’s CRR cut. RelCap got a boost with Nippon Live pumping in close to Rs. 1,500 crores, SUZLON announced Rs. 2,000 crores in orders and the market seems to have shrugged off India Bulls Real Estate’s Q3 net being down 45%

The biggest winners were:

And the few losers of note were:

Good luck for February!

Image via Wikipedia

Market commentators over the last few days have been offering up the Greek debt deal as the reason for flat markets. Its as if once the deal goes through, things will get back to normal again and the stock markets will be off to the races. However, the resolution to Europe’s problem is not easy and is not going to be quick. It is going to get dragged out over the next couple of years and might end badly.

To put the Greek deal in context, the haircuts that are on the table will reduce their debt-GDP ratio to about 120%. This is where Italy’s ratio stands at right now. Besides, Greece’s economy shank 4.5% in 2010 and its Q2 2011 GDP shrank 7.5% from a year earlier. So chances are that this is not going to be the last round of haircuts that Greece will need to get back on its feet. Besides, the whole charade of making only the private sector take losses is going to result in higher yields going forward.

But what’s in store after the debt deal? Its German administered austerity. Austerity is guaranteed to lead to so much social unrest in all the PIIGS that something will break. As the Indian experience shows, its very easy to pander but very difficult to cut back. To give you a flavor of what’s in store: the Italians are already striking, Greece’s tax collection drive is likely to boomerang, Sarkozy is likely to lose the next presidential elections (who knew they took their AAA so seriously) and with a 46% youth unemployment rate in Spain, the official suggestion is that they “leave home”.

Austerity might have worked in the former East Germany, from where Merkel hails. But what the EU needs now is a new Marshall Plan, not a “Fiscal Compact”. Until there are visible signs that such an initiative is in the offing, enter the markets only if you have a strong stomach.

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