T N Ninan: Betting on RBI

Last Updated: Sun, Jan 08, 2012 11:38 hrs

Come a new year, and the guy with some cash to spare invariably wonders how to avoid repeating the investing mistakes of the past year. That explains the spate of analyses over the past week, mostly of the stock market. Many pundits predict that 2012 will be better than its forgettable predecessor, but they predicted that last year too - only for the market to lose 25 per cent of its value. Pundits tend to be professional optimists or Pied Piper wannabes, or they wouldn't make upbeat forecasts at the height of boom periods when common sense should tell you that stock prices are high. Right now, though, their optimism has to contend with the sorry fact that, over a five-year period, the Sensex has moved up by less than 15 per cent, from 14,000 to 16,000. Besides which, the Sensex price-earnings ratio isn't much below the normal range. A significant upside from this level will need a lot of good news.

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What about other asset classes? Five years ago, in December 2006, gold was at under Rs 9,000. In subsequent Decembers, the gold price moved up to Rs 10,000, Rs 13,500, Rs 16,500, and Rs 20,000. This December, it was over Rs 27,000 - marking a trebling of the price in five years. But gold has been slipping - despite which, in inflation-adjusted dollar terms, its price today is higher than it has ever been since the epochal spike of 1980. So is there likely to be a sixth successive good year for gold? Sounds like a long shot, unless uncertainty about the future of the euro leads yet more investors to the traditional safe haven.

Real estate has been another great bet in the last five years. Prices in most Indian cities have more than trebled. But real estate has begun to look like gold - approaching the end of a price boom. Annual pre-tax returns through rentals on residential property have dipped from four per cent of capital value, which used to be considered acceptable not long ago, to three per cent and, in places, barely two per cent. As an asset class, real estate therefore makes little sense today, unless you think the bubble will grow even bigger before it gets pricked. Looks like another long shot when there is excess housing inventory, credit has become expensive, and the number of transactions has shrunk.

So it is not surprising to find the message in the chequebooks: investors have become savers, and switched to fixed returns in the debt market. The massive rush for the tax-free, 8.2 per cent 10-year bonds, which the AAA-rated National Highways Authority of India offered for subscription last week, tells the story. But in an economy with an average consumer price inflation rate of about eight per cent (over the past six years), the bonds barely manage to protect your capital in inflation-adjusted terms. So the rush for the bonds testifies to the risk-averse mood of the investing class, not to any long-term investing wisdom. If all that you want to do is protect your capital from inflation over a 10-year period, and if you have any faith in the future of the Indian economy, the leading stocks would be a better bet.

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If gold is overpriced, real estate looks like a bubble, inflation-adjusted interest rates on debt are close to zero, and stocks look fully priced, there are no obvious options. Watch out then for the game-changers? On the negative side, these could be a euro collapse or an oil price surge, either of which would upset today's calculations. On the positive side, lower interest rates are a near-certainty - or the RBI governor's name isn't Subbarao. Does that swing the argument in favour of stocks? Happy investing!

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