Sudip Bandyopadhyay’s Blog

In a recent Standard Chartered study of gold mine production from 2011 to 2015, it has been mentioned that gold mine production CAGR for the next 5 years will be 3.6% at the base case or down 1.2% CAGR in a bear case or up 5.6% in a bull case.

The limited supply comes at a time when Central Banks across the world  have completely changed  their strategy on selling down their gold stock and are now likely to accelerate their respective net buying programmes.  In case of China, the fastest growing economy in the world, only 1.8% of reserves are in gold compared to global average 11%.  Thus if China tries to bring up  Gold reserves  in line with the world average, they need to buy  additional 6000 tonnes of gold which will be equivalent to 2 years entire world production.

We believe that the factors that can potentially drive the gold price to a significantly higher level from the ones currently prevailing are  :-

· Limited gold production

· Low growth possibility in gold production

· Continuous buying by Central Banks

· Increased demand from India and China

· Relative weakness of US$ and inflation / deflation issues in the world economy

Robert F Kennedy famously said “Only those who dare to fail greatly can ever achieve greatly”. Creating wealth surely requires risk appetite. Wealth, in fact, is the accumulation of possibilities.

Investors have different options to invest their money and every option comes with its own related risks and rewards. While investing in equity has a higher risk and higher return proposition, investing in debt has assurance of return but gains are modest.

In a globally integrated economy, return on investments depends on the risk appetite. Any fixed or guaranteed return instrument provides very low return which may or may not even cover inflation. Thus, deployment of savings in such instruments will surely fail to meet the objective of wealth creation. On the other hand, investments in the real economy i.e. in performing businesses directly or in them through the share markets can surely beat inflation and generate significant wealth. In an economy like what India is today, i.e. growing at a pace of 8-9% per annum, with inflation hovering around 7-8% the average nominal return by investing in shares of companies should be around 15% (i.e. average GDP growth + average inflation). Calibrated selection of stock portfolios can obviously enhance this return significantly and generate great wealth. The billionaires of today are shareholders of well performing corporations, whether  owners / promoters or not. It is also apparent from the performance track record of equity markets that over long period of time, equity investments beat all other investments in terms of returns.

Being afraid of equity investments because of risk is not the solution, managing the risk and taking it to the least possible level acceptable, is. The equity markets are no longer the exclusive realm of the skilled risk takers. With increasing income levels, handsome returns and booming index, only a few dare to shy away from the markets. Even investors with low risk appetite, hold a share of the equity markets through their balanced or equity mutual fund holdings. In order to beat inflation, some financial advisors recommend that even the retired individuals should lock a portion of their investments in equity.Understanding that risk and uncertainty are the key factors that propels the return on investment in the stock market far beyond the returns of Passbook Savings Accounts, CD’s or Bonds. Key factor would be to use the risk and uncertainty of a stock market security to our advantage.

A well-planned investment strategy begins with a proper asset allocation plan. This is the first step to wealth creation. Asset allocation refers to spreading investments among different asset classes. Since the performance of different asset class is different and reacts differently to market conditions, it significantly reduces your portfolio’s volatility. Holding a diverse range of assets is important because it spreads your risk by reducing your dependence on the performance of one particular asset class – a positive performance in one area will offset periods of weakness in other investments. As well as diversifying across asset classes, you can diversify within each asset class – spreading your risk even further. Within Australian shares, for example, instead of just focusing on banking stocks you could also invest in resources stocks or infrastructure assets. As well as big ‘blue-chip’ stocks you could look at ’small-cap’ investments in smaller businesses with lower market capitalisations.

The rapid development of Indian economy over the last few years and the expected continuation of this growth momentum over the next 5-10 years present an unique opportunity which may not exist once the economy matures and the rate of growth slows down. Our generation is in fact blessed with this unique wealth creation possibility through sensible stock market investing.

2011 will be the make or break year for India.  2011 will present the opportunity for India to cross China in terms of GDP growth rate for the first time since liberalisation began. It also poses the possible threat of India losing its steam midway by getting bogged down with silly corruption issues along with nonfunctional governance.

As a country we are at crossroads and its upto us to make our destiny. The robust GDP growth needs to be truly supplemented by an inclusive growth. This needs to move beyond rhetoric and lip service. The danger lopsided growth poses needs to be understood in the context of social stability and acted upon without any further delay.

Considering the momentum gathered by the last few years growth India can surely attain next level of economic development soon subject to prudent economic management and completion of the long pending task of enacting the requisite legislations for speeding up and removing the impediments to growth. We need a functioning parliament and a national consensus on economic growth. We need quick and exemplary punishment for scamsters which will act as deterrant.

Indian capital markets should prosper in 2011 subject to the above referred governance issues being fixed at the earliest and also satisfactory outcome in certain other key areas like monsoon and crude oil prices.  In spite of all the developments, Indian economy continues to be dependent, to a great extent, on rain Gods.  Monsoon needs to be good and appropriately distributed.  This will result in continuance of agricultural growth and prosperity in rural India.  Good monsoon also has a positive impact on domestic inflation.

After Monsoon, second most important factor for  Indian capital markets continues to be international crude oil prices.  This needs to remain below $100 per barrel to ensure that inflation is under control.

Our expectation is that over next 3-6 months, crude oil prices will start coming down and stabilizes at around $90 per barrel.  Along with this, if the rain Gods are smiling on India, rapid growth of Indian economy and capital markets is a foregone conclusion.  The Central Government has also started showing signs of taking appropriate remedial measures to fix the governance issues.

Investors with a time horizon of one year plus should treat current softness of India capital market as a great opportunity for value buying.  Continued strong domestic demand and even a marginal recovery in international demand will propel Indian corporates to deliver 20-25% growth in earnings in 2011.

Looking forward to a great 2011 where India will regain its true position in the comity of nations.

Albert Maslow postulated hierarchy of needs.  With gradual improvements in our financial status, our needs keep changing.  At different levels of economic development, the priorities are different.  Water borne diseases may be important at a certain level to income, lifestyle diseases at another.

In his brilliant book, “The Hungry Tide”, Amitav Ghosh explores the fascinating delta of Sunderbans in West Bengal and unfolds the mystical quality of life and natural beauty of this area.  The elite population of the world, post this work of Ghosh, is now aware of the beauty of Sunderbans which is undeniably captivating.  However, the quality of life for the poor residents of this corner of the country continues to remain pathetic.  There has been no development whatsoever for the past 100 years and all proposals for development of tourism in this area have been scuttled by concerned environmentalists not willing to disturb the fragile eco-system of the area.

May be its time to pause and ponder over the impact of our environmental crusade on the lives of poor tribals and residents of places like Sunderbans.  Are we morally and ethically correct in preventing development in the under-developed areas in the name of environment.

Yes the tribals need to be consulted on how exploitation of mineral resource is planned, but by allowing environmentalists to prevent exploitation of mineral resources or travel and tourism development in backward areas we are ensuring that these pockets remain green without becoming rich.  We are imposing environmental standards on backward areas without considering whether the trade-off is in favour of the local population. At our level of development, are we ready for these luxuries?  We need to probably work towards increase of per capita income in these remote under developed areas before beginning to attach such premium to environment. Environmental cost needs to be weighed against the Social and Economic cost of underdevelopment of a vast area of the country.

Rapid economic growth over the past decade or so has had its welcome trickle-down effect in rural India , with a healthy growth in income. Better connectivity – both roads and telecom with cities and electrification have boosted productivity and brought hitherto urban-only products and services to rural doorsteps, fuelling a consumption boom that famously saved many a big-ticket marketer from the global economic crisis-led demand slowdown in cities in 2008-09. Inclusive government policies, like the rural job scheme, loan waivers and better prices for crops acted as stress mitigators wherever markets failed to deliver or were absent.  Microfinance and organized retail, currently limited in reach, have demonstrated the multiplier effect of reaching directly to rural consumers and producers in lifting rural incomes and productivity.

Financial inclusion has become a buzz word in the government and media circles.  All efforts in this area are directed towards either providing micro finance or spreading the reach of the banking sector to cater to the unbanked population in the rural areas.  However a  significant component of financial inclusion,providing adequate avenues for investment of savings, is neither available to the rural population nor is being talked about.

5,93,731 villages in India contains 815 million people comprising of 151 million households.  They represent 70% of Indian population and 56% of  national income.  Even if we exclude the population below the poverty line and rural poor ,33.4% of Indian middle class stay in villages and rural India generates 33% of national savings.  To ignore this market as irrelevant and insignificant is definitely not appropriate from the corporate India’s point of view in the medium to long term.

Unless rural India  is provided with adequate investment avenues almost at par with urban India, the vicious circle of under development  and poverty cannot be broken. Savings of Rural India needs to be deployed in productive assets which should generate handsome gains for the savers. The power of saving and compounding should start providing rural folks real good gains. Deployment of savings in Bank Deposits or Post Office Savings will not enhance their wealth. Also lure of high returns should not draw them towards dubious schemes.

There is a crying need for a conscious continuous effort to take financial services distribution to the villages in a cost effective manner to cater to this segment of the population.  The proponents of financial inclusion should definitely start taking concrete steps towards achieving this above goal.