Sudip Bandyopadhyay’s Blog

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.