Creating wealth in a volatile world
Recently, the news flow has turned quite pessimistic. A lot of investors are worried about their investment future. Markets have always surprised but the last two years have been the most surprising even to the most experienced investors. In this article, I explore the wrong notion of news flow, the reality of our economy, and the scope of wealth creation across major asset classes.
My concern about the news flow
When was the last time you read a newspaper and were happy? The reality is that the news business thrives on negative news. Now imagine, if you want to allocate funds and you are looking at a news channel or reading newspaper for some idea, chances are very low that you will find anything relevant.
Any student of economics will understand that when interest rates are low, growth momentum picks up and that causes inflation. Similarly, when the inflation is high, RBI would increase the interest rates and that will cause growth to taper down. These movements create investment opportunities. If the market rates are held constant, there can’t be any investment opportunity.
News flow paints the problem of the west as India’s problem. A lot of developed countries had near-zero interest rates when the pandemic unleashed, these countries started distributing money to pump up the economy. Now the economy is pumped and so is inflation. They will increase the interest rate to restore inflation.
India has its own set of issues. The primary issue is the reliance on oil and the oil prices mounting every single day. India did not distribute money to everyone but only to a section of society. The option to withdraw money from provident fund or clearing income tax refunds does not cause inflation. The underlying of our inflation and that of the west are different.
India, a thriving democracy
India’s economy is the sixth-largest economy in the world. The country has one of the highest GDP growth rates in the world. India's GDP will likely grow over 7-8% in the next 4-5 years. Assuming inflation to be at 7%, the nominal growth rate will be 15% pa. This would mean that we will be double the size of our economy in the next five years. This is huge!!
The unemployment rate in India was 7% as of January 2022. History indicates that this is one of the lowest unemployment rates in India.
More than 50% of India's workforce is employed in agriculture while the sector contributes nearly 15% to the GDP. As manufacturing and service sector takes over, the share of agriculture will continue to go down.
We have been consistently collecting GST above ₹1.3-lakh crore since October 2021. We have surpassed ₹1.6-lakh crore in April 2022.
Oil prices are more than $120 per barrel. In April 2022, retail inflation increased to 7.8%.
The risk I see in our economic growth momentum is the oil price. As far as the oil price is maintained, we will survive, if the oil price corrects, India is sure to gain. If the oil price climbs further up, more pain is in store.
What does all this mean for your portfolio:
As far as growth momentum is high, equities will continue to do well. So far, India’s corporate profit is shining. Companies that rely on global markets, will face the headwinds. Companies that have a high return and low debt catering to the domestic market will do alright. The current correction provides opportunities in this space.
Often people look at an interest rate as a return on any debt instrument. That may be true for a fixed deposit with a safe bank, but not otherwise. A private bank offering a high return may be risky and avoidable.
A 10-year government bond is backed by the Government of India but still, it is risky. We must look at the yield to maturity and not the interest rate. Yield to maturity (YTM) is the total return that will be earned when the bond is held till maturity. So YTM considers the interest rate and the price that you pay. In the current interest rate scenario, investing in a 10-year government bond is quite risky.
So, you are pretty much left with low return liquid funds or fixed deposits. Another way to pump up return is to invest in high dividend-yielding companies along with REITs.
When fear takes over governments, they buy gold. If the current fear is so high, commodities shouldn’t be high. This means, that growth momentum is there along with demand. The fear is more supply-side and should bridge up sooner than expected. I am not very positive about gold; it should be range-bound.
Rental yields are a hedge against inflation. The price of any asset is the discounted value of future cash flows. If your rental cash flows increase, the real estate value will increase as well. Although we don’t have a perfect real estate cycle in India, broadly speaking, we have a 12–15-year peak-to-peak cycle. If we saw 2012 as the peak, we should see 2026 as the next peak, this means the prices should start climbing now. Please note that an apartment is not an investment, land and commercial property is.
As an advisor, I prefer fear over euphoria, it creates opportunities across asset classes. This is the time to get active for the next 3–5-year cycle.