House hunting in Mumbai

I have been trying to buy a house in Mumbai sub urbs since June and has not been able to find the right one. Unfortunately, apart from one house, we did not find anything livable.

The one we liked, the owner asked for 30% in cash. I am a salaried individual and i can no way pay in cash, especially when most of the money is going to come from a loan.

I sometime wonder how people in Mumbai pay vulgar price for a shitty houses.

One house i saw was a duplex and had all walls broken, including the front . The broker was trying to sell me the concept of rebuilding the way I want to. There were about 10 flats in the building with 8 being empty.

One house I saw was a 2BHK with 3rd being optional. The builder did not build the 3rd bed room, but kept provisions for the 3rd bed room. In this way, he had to pay lesser tax but wanted to charge the market rate to me if I wanted to buy.

The best had yet to come. I saw one under construction building, hoping to be ready by Mar 2010. When I went to see the flat, I was told that builder is in distress and I could buy any flat. However, when i went to see the buuilding 2nd time with my wife and liked one, broker told me that everything is sold. I could buy a flat at 40% higher rate than what was originally told 2 days back.

It is crazy and I dont know people like me, who come from outside, would ever be able to buy a livable house, which costs same as that in Singapore, however, in a shitty location with very poor construction.

Why equity markets are not falling??

Equity markets are not falling at all. The move has been one way up since Mar 09. I remember one of my cousins calling me on 9th March asking whether he should buy Index futures and I told him not to do so. He lost a fortune because of this. In hindsight, he was bang on target as the market had started rising from 9th Mar 09.

I, in my fund manager wisdom, thought that 2500 might not be the bottom for Nifty. But I, because of my limited experience, ignored one very powerful thing. The power of various goverments and central banks and when both decide that asset prices should not fall and should go up, no body in the world can do anything. Money is available, is cheap and credit is not happening. So where is that money going? Buying assets and increasing their prices. Practically, the flow and availability of money could make every price possible for an asset and could make everything bad economic data look good (imagine historic unemployment in the US, increasing every month and stock market being equally strong).

Last bubble also started on the same line - cheap and easy money prompting consumers to leverage.

Will we see the same what we saw in 2008? I dont know and the chances are that we will not see another Lehman. Governments have learnt the cost of systemic risk.

So will the markets and asset prices continue to become expensive. Answer is yes till Federal Reserve tightens its belts.

Whent this could reverse? High inflation? Rising interest rate environment? or something else? I have really no idea. But whenever it happens, there is a high chance that it would be bad.

Equity valuations in India

On last 12 month numbers, Nifty valuation is as follows:
P/E = 21.59, E/P = 4.63%
P/B = 3.77
Div yield = 1.06%

10 yr G Sec yield = 7.38%

The earning gap between 10 yr and index is 2.75%. This means in a secured asset, 10 yr G Sec paper, the investor could get 2.75% more than equities. Clearly, the risk reward is not in favor of equities. So, equities could fall by 15 - 25% and investors may need to reduce allocation to equities.

The fall of chinese market

Chinese Stock market has lost 25% from the top and 50% from the bottom. Shanghai Index had gone from approx 1700 to approx 3400 in the recent rally. In the last few days, it has fallen to 2700. Is it the start of imminent retracement of the great bull run? It could well be true as very few people know what happens in China. In the past, when the Chinese economy was growing year on year, there was doubt about its growth and sustainability, however, it still grew and people were proved wrong. This time people have been expecting China along with other parts of Asia to take the world out of woods. Will they be proven wrong again?

The current rally has primarily been based on liquidity and availability of cheap money. Going forward if the liquidity tightens and interest rates rise, all the good feeling could reverse quickly and we could be back in 2008.

To make it a possibility, let me tell you what I heard a yesterday. Any decent size Indian real estate company has held back salaries of employees for more than 6 months as the companies dont have the money to pay. Most of such company stocks have gone 3-4 times from the bottom and QIP has happened like no tomorrow... I dont know what market is valuing the companies for..

what is the way forward

I met 2 of my private equity friends. They mentioned their investee companies are growing and profits are increasing sequentially. Fear of sudden slow down are gone, companies have dramatically cut expenses and are building on the base set out in 2008.

Assuming what my friends said is true, it does not seem that equity market is going to fall soon unless there is a sudden surprise. further, if the way things are, we might touch a new high soon, may be as early as before mid of next year.

Will call you back...

Will call you back... I tell so many people and many people tell me on daily basis..

In the increasingly connected world, where everybody carries a mobile, this is an obvious answer if one is busy or dont want to be disturbed or dont want to speak to the other person.

In each of the three possibilities, the meanings of 'will call you back' is very different.

In the first case, the person is genuinely busy and cant take the call. So, ideally he would call back whenever he has the time.

In the second case, the person is busy with something, could take the call but does not want to. e.g. he is with family, he is sleeping etc.. In this case, he may call back and probability is 50%..

In the third case, when the person does not want to talk, he could speak but does not want to.. may be he does not like the person, or he thinks it is a waste of time to speak with him or something else.. In this case, he would not call back most of the time..

what does it mean for the person who had called... he can interpret the behaviour only with experience... and this experience is taxing unless the person did not have expectations of getting a call back..

India dream

I decided not to go abroad after my graduation. Getting a job outside India in 1997 was clearly very difficult and pursuing an MS, after getting bored B Tech was too much to ask for. I slept most of time in my engineering days and did not even studied a single course . When I say this to people, people think I am making fool of them. They dont expect an IIT graduate to say this.

Many of my peers did the same. Instead of going abroad, they joined Indian companies. Many went to Indian software companies but a few managed going to consulting companies. But lure of working abroad and higher salaries was too much to resist for many of them. So, most of them eventually, after spending sometime in India, went to USA, worked there for a few years and then MBA at Ivy League.

I had decided not to go. I still dont know why i did that but probably staying in a foreign country scared me. I continued to struggle. I got bored at KPMG after 3 years and then made an attempt to start a technology business. Business did not even start and I lost everything I had. I thought it was an incredible experience but probably too much to ask for. I had lost hair and aged a few years. Like others, I thought it is time to quit and start again.

I applied for MBA at Ivy League schools assuming that my enterpreneurial experience would get me anywhere despite low GMAT score, but I did not even get shortlisted for interview. Later on, I came to know that my essays were disaster. Further, for the sake of diversity, all these schools have unpublished quota on how much they would take from a developing country like India.

IIM did not fit my way as I thought I was too old for the class, may not get admission or even if i get, I may be last in the class after 2 years. I could not compete with a fresh IIT graduate with high IQ. I was an average Indian. So, I decided to go to ISB.

It was not easy there either. I scored in 3rd qurtile in most of the courses and some I just managed passing. In the placement season, I applied to almost every company but no body took me. Mckinsey thought I was too arogant while Novartis thought I was not a woman with CA. Some i rejected as I did not know what I was looking for. But I had to get a paying job as I had a loan to pay and no savings. After much struggle, got a few jobs from campus in 2003. Here again, I decided to join a company which would be primarily a local business. I still think that was probably the biggest mistake of my life. But any way, the saving grace was that I was young and could flip job later as opportunity cost of changing a job was not high.

However, the pressure of peers from IIT days continued. As compared to some of them who graduated from Wharton / Chicago / Columbia, had fat salaries and reasonable savings. I was at $15,000 annual salary with $2000 annual bonus. But India dream was high. I thought if India does well, I would catch up.

2003 - 07 was dream run for India. I also grew with it. India shinning story was getting attention and some of my peers, working in the USA, started thinking of coming back. However, they were looking for a $ equivalent salary. I thought an Indian business may not pay that salary for a 7-8 year experience individual, but I was wrong. An Indian businessman / CEO was willing to pay 3 -4 times to a foreign returned professional when compared to an Indian equivalent experience. I thought if I had done the same, i would have also got the same.

However, many of them initally found very difficult to adjust. Indian working style is very different. Long working hours, peers are thankless, weekend working, getting a call at 11pm in the night.... Many of them wondered, like me, is it worth it??

But India shinning continued... and is still on... Sensex is up almost 100% from the bottom..

Often I get a mail asking - Should I come back?

Quarterly results

The Goldman results have again shown what the firm can do even in tough times... Intel also has beaten the estimates..

I have become positive on equities

Another day in the market

Days in the slowly falling equity market becomes very borning. I come in the morning, see the market opening gap down and the trend continuing throughout the day.. What to do?? wait for the right price..

Indian debt saw some action today and yields of some paper actually fell... I hope it continues as we have taken a large exposure to income funds.. what to do here?? remain invested and let the up run continue..

Investment in Indian debt vs equity

I think debt might be on its way to come back... This is relatively contrary to what market has been saying... where people are expecting yields to go up as growth would resume...

i have slightly different view point...

commodity markets are typically lead indicator and are saying that demand is slowing down. oil has corrected more than 15% in the last few weeks.. Typically, if growth is happening, demand should increase and oil should go up.

US yields are falling.. the 10 yr is at 3.30%, way off from the peak of 3.9%+.. The US government is talking about second stimulus.. my assumption is that if things are improving, why would the government talk about second stimulus when they know the risk of printing money. so it means that things are not imroving..

Equity market is typically the last to follow and may have gone ahead of itself... so should it fall... the inevitable answer might be "yes". And as usual, the tpyical retail or HNI investor who came in the last two months, will loose.. I hate to say, but the probability of this happening is high.

What to do ahead of quarterly results

Jun 09 quarter results will start from tomorrow with infosys coming out with its numbers. What to expect... a big surprise - on the positive / negative side or status quo.

Market has been on the downfall post the budget but still expecting growth. If growth in earnings is lower than expected, we might see a big fall as valuations are still high.

So, I dont see much upside unless results really surprise. Higher multipes in the recent past have been compared with 2003 - 07.

The time in 2003 was not the same. Results surprised every quarter. Even if valuations became expensive and correction happened, higher growth helped market pushing higher. Interest rate continued to be low.

Things are different now. Demand is low, interest rates are not low enough, credit is not easily available..

So, i would wait and watch..

A historic opportunity lost

New Indian government presented its first budget on 6th July and what a waste of opportunity... there was nothing in the budget to cheer about... the finance minister doled out a number of measures for masses - increase in NREGA payout, increase in social sector spending, reduction in surcharge etc... no mention of where he is going to get the money from.. no mention of administrative reforms...

Because of the borrowings, interest rates will not fall and country will face monumental debt in the future... and this debt + interest will need to be paid by the future tax payers...

This was probably one of the few times I was personally hopeful that the politics may rise and look beyond popularity and could try to steer the country towards better tomorrow.. i have been proven wrong again..

Government has shown that it is very difficult for it to do a balancing act... it cant manage a stable process wherein higher spending is matched with higher resources... since higher resources is political taboo, why to mention in the budget... and does any body care if instead of raising resources, the money is borrowed...

in my view, unless the country faces serious issues, politics will not rise to the occassion.. may be this is the way democracy evolves..

Auto fuel price hike...

This is the first time that there was no debate about the auto fuel price increase. The government announced on a day in the afternoon that petrol will be increased by Rs 4 and diesel by Rs 2, increase effective mid night.. It is a sea change from last 5 years when there were consultations with left and other coalition partners before any decision is ..

By increasing the price without consultation, government is indicating that it means some business and Congress is in control and will run its show. I hope it continues...

Budget on 6th will be first policy statement by the new government and I hope it is a mix of social and right economic initiatives, so that economy can continue to grow with right balancing act. No body has expectation of big economic reforms and structural changes... people expect it to be aam aadmi budget.. but if government can show measures to channel the subsidies and reduce pilferage, it will be a welcome relief...

I am confused..

I am confused on the equity markets. A week back I had a view that market should fall and then I read an article in economist which says that US policy is to have lower interest rate till growth resumes, then I thought I might be wrong.. Today, market just crashed and it was scary to see some large caps correcting more than 5%. I really dont know what is happening.

Market is moving in a very narrow range... despite that, if one would have bought any decent stock since the election results, he would be sitting on a loss. So, logically, if no body is making money, FIIs have been selling, then why the market is not falling...

the technical charts have been showing a typical distribution pattern, similar to the one that was seen from Dec 2007 to mid Jan 2008.. i hope we are not in that kind of a fall..

I have been sitting on debt since April (the time when for the first time, i had some cash since my MBA) and not able to convince myself to shift to equities. my wife keeps on reminding me of the opportunity loss.. i thought of shifting some yesterday, primarily being tired of sitting out ... then i told myself, markets have habit of tiring an investor and if he does get tired and invests as a result, he is bound to loose. so i somehow convinced myself to wait for some more time.

Also, it is still difficult to imagine how one of the worst recessions in modern era could be over by just shifting private debt to public debt.. how even after doing valuation of a stock on record numbers of 2008 , stock are still reasonably expensive but the market is not falling.

I would rather wait..

Budget 2009 and equity market

I hear people saying a correction is imminent post Budget as market has moved ahead of fundamentals. Similar set of people were making 3rd front assertions before election results. Then there are people ike RJ, who say that we are in a new bull run. I really dont know whom to believe. But one thing is for sure, we will always have people who will be on either side at any point of time.

My view is that given the announcement made by various ministers in the last few weeks and focus of the government clearly on implementation, it is likely that we could have a budget much better than expected. Government could lay a road map for financial sector reforms, disinvestment, borrowings for the year, food security etc. If this is the case, market could go up instead of falling.

Appointment of Nandan Nilekani and its impact on India

Nandan Nilekani appointment is not a small event. It shows the willingness of the Indian government to rope in expertise available in the private sector and maket it work for public good. The model has been there in the US for long, but India has tried this only once earlier (where Rajiv Gandhi got Sam Pitroda).

In my view, this is the real reform that India needs apart from what is widely talked about in the media. We need willingness to execute on time and then ability to get the resources from wherever needed.

This is a big positive for Congress which is showing willingness to get things done.

an interesting article

Yesterday i wrote that why equities would fall and investor should put money in fixed deposit.

pl read the article following the link:
http://www.economist.com/businessfinance/displaystory.cfm?story_id=13856176
according to this, i might be wrong.

Where should an investor put money today...

Equities have not given any positive return in the last one month.
Debt funds are negative since Jan 09...
Commodities are also falling...
So, where can investor put in money right now?

We are in uncertain zone..the risky assets had significant run up in the last few months on the expectations of a global recovery. It is still expectation and the numbers have to still show up. In the last one month, the momentum build from Mar 09 to May 09 on the recovery theme is faltering with a downward bias.

On top of it, the rain god has not been kind. Mansoon is late and sub optimal. On top of it, as per reports in the paper today, government has completed 16% of the projected fiscal deficit for 2009-10 in April itself..

The basic premise of the recovery is that lower interest rates and government spending will spur consumption and help in reviving the economy. If government borrows more, resulting in higher interest rates, the basic assumption on which recovery theme has been built, may not hold. Private consumption and investment may not revive back and growth expectation may falter.

So given the uncertainty, a fixed deposit with a bank or cash funds may be the best option in the short term.

Why Indian equities should fall..

Indian market has given almost 20% more than other emerging markets in the last one year. Can this continue, the answer is no.

The primary reason being that investor in both the markets is same. He puts money in other emerging markets and in India also. So, if India becomes expensive, he will put in others.

Indian 10 year yield is trading at 7% while earning yeild of stock market, E/P of India is closer to 6.5%. This means Indian equities, in general, are expensive than Indian bonds. Since stocks are riskier than bonds, stock yield should be higher than earning yield.

Though P/E of sensex is at 16 times but individual stocks are trading at in excess of 20 times, which is way expensive.

Last but not the least, investor's could be betting hugely on the budget and quarterly earnings. They could be in for disappointment.

where do you make the investment in India..

It is probably the most difficult question I face and i really dont know... equities, debt, gold or commodities

Equities are getting cheaper day by day and may get more.. so, does it mean, one should wait.. answer for is probably yes because if the pain is prolonged, one get could similar price or cheaper even next year..

Debt is becoming expensive despite the rate cuts.. huge supply from the government and risk aversion of putting in corporate paper.. so will incremental returns not come.. answer is that returns will come but not in linear fashion.. it will be more range bound and incrementally, 1 -2% extra over the year..

Gold.. everybody is putting money.. is it the same what people were doing for equities till Jan 08 or in debt from Sep - Dec 08.. the asset class is becoming expensive and is a hedge against crisis. once the expectation of crisis is over, this asset class should come down..

commodities.. this is probably the space where one can start putting money incrementally over a period of time. lost value of 60 - 90%.. supply cuts have happened.. so when the growth comes back, this asset class is going to shoot..

Importance of sitting idle in a job

Given the market conditions, most of us who work for financial service companies, don't have much to do during the day.. Sometime passing time becomes so difficult that one does not really know what can do apart from doing normal routine work, reading and watching news etc..

But is it bad.. i really dont think so.. Financial services is a cyclical business, which goes up and down with the economy.. So, if we have chosen this career path, it is better we get used to it..

Sometimes, these environments actually are good for longer term.. one can introspect.. think whether whatever one was doing was right or wrong.. use this time to enhance the skill set (i am trying to do CFA, but with family and kid, it is really tough.. and i dont know still whether i will pass..), meet people, spend time with family etc.. look for opportunities that could come in good times and prepare for that..

Most important of all, which i feel is, it helps you learn how to go through the bad time and makes you stronger.. one realises the importance of money and why basics (P&L of a business) of business are important.. though people might have different view point in hey days.. but at the end, it comes back with full force..

Why Indians were in denial..

Indians were in denial mode since the begining of slowdown in Oct 07.. the reason given was that India is insulated from the world, exports are very small part of the economy, large demand is domestic etc etc.

what actually happened?? the growth came down from closer to 10% to 5.1% and may fall further... now the saying is "we are still growing while the world is contracting".

I think all of us who are in India needs to understand that capital flows are a global phenomenon and India is very much an integral part of it. Indian growth happened because of external capital was available and that could create demand.. now the external capital source is gone and we are back to traditional modes of financing through the banking channel.. obviously we will growth at rates prior to 2003 levels till the capital flow resumes..

Second, directly through exports and indirectly, through capital and oil imports, we are part of the global trade. Any repurcussion of this would have an impact on us..

So, all of us need to get used to slower growth..

Importance of manager selection while making investments

A common investor typically does not pay attention to importance of manager selection while making investment decisions. These investments are typically in fixed income or equities either through mutual fund or insurance ULIP. If the right due diligence is not done, the investment could result in sub standard returns.

A few of the common questions any investor should ask:

1. Consistency of past returns. This can be determined by taking quarterly returns for the last 2 years atleast and comparing them to the benchmark the investor is most familiar with. e.g. for equities, it could be Sensex and for debt, it could be Bank FDs.

2. View on the asset class: Investor needs to ask why he is putting money in the asset class. Will he make money in the near future? Is the asset class expensive or cheap? in case of equities, what is the valuation (this can be figured out by going to www.nseindia.com, click on indices and go to statistics tab). PE below 10 is cheap while more than 18 is expensive for India.

3. Volatility of returns: Are the returns volatile? more or less? this can be found out by calculating standard deviation of the returns. On can take historical NAV of the fund, calculate daily returns, and then calculate standard deviation.

4. Stability of the investment team: The team which is managing the investment function and the fund manager who will manage the particular scheme, is he there for long? Typically the team should be there for more than 2 years. This can be found out by either going to factsheets available on the fund house website or looking for addendums on the fund house website or simply calling up the fund house and asking the questions.

More later..

Indian equities on 20th Feb 2009

Market opened 2% lower and kept there only.

Yesterday we were speaking to one of our managers and he mentioned that US seems to be stabilising (latest edition of economist also says so http://www.economist.com/finance/displaystory.cfm?story_id=13145616) but Europe is a worry as bad news has started increasing. So there could be one more panic before we reach the bottom.

If this is true, my view of market bottoming at earlier lows might not hold.

The pattern of fall at 3000, 4000 and 5000 of Nifty level is similar. It starts with a panic and then retracement and then slow fall. Currently, we are falling slowly from 3000 Nifty level. Will it bounce bank from earlier lows of 2200 of Nifty, I really dont know. Indian valuations are not expensive any more, but not cheap either.

Indian debt on 19th Feb

At last the debt market has started moving.. At last, RBI Governor indicated that impact of global slow down is severe on India and there is a room to cut rates. Given this news, the Gilts started edging up.

However, I still get surprised that debt market, which is primarily dominated by institutional investors look for such cues. If one talks to a few businessman on the street and assumes that Government and Central bank will do their bit, rate cuts are evident. The question could be how much and when..

If we believe that the slowdown is unprecedented and not seen by most of the people in their careers, then experience based view is irrelevant. Ideally, we should touch historical lows at some point of time.

Obviously given the gains made in the last few months, the new lows would not happen in linear fashion. Patience could be tested..

Markets on 17th Feb

Equity and debt markets are behaving strangely. Many conflicting signals:

Vote on account budget did not do anything, equity market was disappointed. But why.. vote on account is not supposed to do anything big.. so build up of expectation was anyway wrong. my view is that market fell because of global factors..

Bigger issue is in debt.. Governments are all over the world are taking fiscal measures to prop up growth.. Obviously this is going to happen through borrowing from some body - private investors, market or straight from the central bank.. Typically, it is through the auction where investors bid.. now when the government is doing the same, the concern in India is of Fiscal deficit running high.. One thing has to happen - either higher fiscal deficit or lower spending. There are questions about where to spend and that is debatable.. in a democratic set up and in an election year, social set up will take priority

Visit to North India

I happen to visit North India last week for a family function. I happen to interact with a number of people, who are uninformed investors, to get a sense of what the general public is thinking.

Business community is going through very tough time. Most of them will loose money this year. It is even difficult to recover variable expenses, leave alone the return on fixed assets and opporutnity cost. However, in the last 15 days, things are begining to improve slightly.. it might be an indication that worst is probably over and incremental deterioration might not be there..

A retail investor is sitting on huge losses. People thought 20 -30% fall is maximum and market would bounce back. These individuals have also lost 30 - 40% and now have no interest in further investment in equities.. So going by the fear factor, we could be closer to the bottom.. but will recovery happen? ... i dont know.. but will investors make money from these levels? i think so..