Sudip Bandyopadhyay

In the Hindi blockbuster movie Gajini, the lead actor suffers from a
disastrous aliment “Short-term Memory Loss”.  The current market euphoria
across the world reminds me of a similar mental state for investors across
asset classes who are unable to grasp the toughest lessons of last year’s
global economic crisis.  The crisis was predominantly about
unsustainability  of macro imbalances – imbalances within and between the
nations as well as flaws in policies, regulatory structures & risk
management practices that allowed these imbalances to take the world to the
brink. Many of these structural issues haven’t been adequately addressed
yet. The macro  imbalances continue .In the midst of a very lukewarm
recovery in few economic indicators, the recent rally in almost all asset
classes is baffling.The current market upswing is being driven by huge
surge in liquidity, consequent upon biggest ever simultaneous liquidity
injection by the governments across the world. The danger of the current
euphoria is apparent with a very clear writing on the wall regarding
forthcoming acceleration in inflation numbers across the globe.  This is
driving the gold prices which are hitting record highs.  Even oil& other
commodity prices are  showing steady rise &  the unprecedented  liquidity
is keeping the equity markets  buoyant.

Confused investors are seeking answers and searching for  appropriate asset
classes for investment .  They are clinging on to gold.  With looming
inflation in the horizon I don’t see any fault in this logic of buying or
holding on to gold except the fact that the appreciation in gold may not be
significant  in the near term considering the fact that it is already at
record high.  But for long-term purposes gold will continue to remain an
attractive investment avenue. Jim Rogers the renowned commodity bull
recently mentioned ” I can’t say what will happen to Gold tommorow..but if
you ask me whether Gold will go up in the long term…I would say yes .”

Oil as an investment avenue is a bit complicated and at present avoidable
for the general investors. Inside every Oil bull beats the heart of a
brooding pessimist.Crisis , turbulence & disasters enable Oil prices to
shoot up.  Apart from demand/supply dynamics, geopolitical issues play a
significant role in determining the price of oil. Geopolitical tensions
around the world are currently showing signs of cooling down with more
mature US policy response to the various issues. While the economies  of
China, India and few other developing countries are on their recovery path
, the same is not true for the European and US economies.  Subdued global
economic activity depresses demand for oil and consequently  its prices.
Popular belief that holding  oil as investment can act as a hedge against
forthcoming increasing inflation will not hold true  unless & until
economic activity around the world significantly picks up.

Thus, in spite of nervousness around the world regarding sharp rise in
prices of Equity Shares over the last six months, investing in stocks will
continue to remain attractive.This is specially true in case of India.
During the boom of 2007, the rate differential  between the GDP growth of
US,Western Europe and India was around 3-4 per cent, as India was growing
at around 8 per cent, whereas these economies were growing at around 4-5
per cent. Conservatively India is expected to grow at around 6 -7 per cent
during the next few years, whereas US and Western Europe will either show
de-growth or grow marginally.  Thus the GDP rate differential  has only
moved up to 6 per cent, making India more attractive as an investment
destination.  India will continue to attract significant long-term FII fund
inflows ensuring that there is ample liquidity in the market. Domestic
savings will also continue to get channelised indirectly through the Mutual
Funds & Insurance companies. The trick would be to identify the right
sector and right company in these sectors.  With the economy growing at 6 –
7 per cent, and expected inflation of around 4-5 per cent, the nominal
growth will be 10-11 per cent.  In such a scenario, the performing Indian
companies will definitely provide a CAGR of around 15 per cent over the
next 5 years.

 It is also very important to remember the cardinal principle of
investment…don’t try to time the market..be in the market for a time.
Today’s stock market levels are much closer to the 2007-08 peak than the
bottom of 2008-09 & in the short term market movements will be volatile &
choppy. The world economic scenario is still not very rosy & liquidity
levels may fluctuate wildly based on entry or exit of FIIs. However the
medium to long term projection for Indian eqity markets are very
encouraging & Investors with similar time horizon should definitely look at
equity investments for building their wealth.

Financial inclusion is one of the main planks in India’s drive to wipe out poverty – equal to efforts to build physical infrastructure. Government experts define the policy as the “delivery of financial services at an affordable cost to the vast sections of the disadvantaged and low-income groups”. Officials estimate that more than half of Indian rural household about 46m homes – do not have access to credit.

The problems in India’s rural sector are well documented. About 72 per cent of the country’s 1.14bn people live in rural areas, yet agriculture produces only about 21 per cent of gross domestic product, according to the World Bank. That leaves the majority of the population living off a small chunk of the economic pie. Small and marginal farmers, those with two hectares (five acres) of land or less, comprise three quarters of the nation’s farming households but own less than one-quarter of its farmland. In the poorest states, such as Bihar, small and marginal farmers comprise about 96 per cent of those working the land, industry experts say. A lack of transport and other infrastructure forces farmers to sell their produce to village “aggregators”, the middlemen who take it to markets in nearby towns. With a better knowledge of prices than many of their poorly educated clientele, the middlemen can dupe farmers into a steep discount. They double up as money lenders, providing farmers with credit for seeds and equipment, often at crippling interest rates.

Micro finance and NBFCs can play a huge role in this space. Ofcourse a fully developed & integrated commodity market can also bring in all the related services including collateral management , warehouse receipt financing etc to remove the funding bottlenecks.

The issue becomes even thornier when government funds start to raise external debt to finance acquisitions, as in the case of Mubadala and a few other UAE-based funds, as in this case it is not just ‘sovereign’ wealth that is being invested. A distinction also has to be made between funds that invest the nation’s wealth, such as Abu Dhabi Investment Authority, and those that invest the wealth of the ruler, such as Dubai International Capital. The latter is not usually described as a SWF.

Finally, strategic investors take more active stakes in companies they invest in than either of the above two groups. These SWFs are typically quite small. Dubai’s Istithmar, Abu Dhabi’s Mubadala, and Singapore’s Temasek Holding fall into this category.