The Great Expectations

The phenomenon of boom continues throughout the globe. The economic activities are on upswing. Trade and commerce is growing. Industries and services are on expansion mode. Small may not be becoming big but big is becoming bigger. There is an overall increase in price due to higher demand but there is no dearth of supplies. Prices of petroleum products, metals and all kinds of commodities are growing. Costs and so prices of the manufactured goods are hardening. The rate of interest is slowly moving up but the rate of inflation is within control. Industries and service sector majors are making good profit and even super profits. Lot of capital and talent is being attracted to set up new industries and businesses. The world economy so far has not buckled to increase in the prices of petroleum products. There is a global upswing in business cycles of unprecedented scale. It is spring everywhere. It is one of the most beautiful springs in India.

I am bullish on global economics upswing in short run and bullish on India in medium run. There is no sight of recession anywhere though a cautious approach is needed as Indian economy is already on higher levels. Still, excessive conservatism or caution can make an investor feel left behind. The opportunities do exist but they are not for chicken hearted.

It is essential for an enlightened investor to understand how a collapse smells, how it looks and how it makes feel. If this process is clear to an investor he is better equipped to face the vagaries of economic uncertainty. An unprece-dented boom can be followed by severe down- turn. The investors should be vigilant about the economic signals. They should have a proper exit route out of their portfolio. They should understand the potential risks of the downside and should be capable of withstanding the same.

The recent boom in India was of such unprecedented size and natures that though people do talk about recession they have probably forgotten how it looks. The Indian Bull Run is looking eternal though everybody knows it has to end. The fear factor of being left behind is attracting investors in every category of investment. The sheer large money supply including foreign portfolio investment has perked up the liquidity and that is pushing up the asset values. The stock prices and even property prices in certain areas have multiplied over the last three years. Land prices have simply zoomed. Investors are feeling anxious but happy. How long this party will last is a million dollar question.

Over the last few years the power of knowledge has increased dramatically. Information is freely available and is available in detail. There are no economic secrets. This results in better forecasting and it makes the valuations build on expectations. This build up is happy in the boom time; but can be painful in the times of slowdown.

The next slow down, whenever it comes may come stealthily. The professionals may smell it before the common investors. The markets may start going down when every thing around may still be looking rosy. A boom is built on expectation of future profits and so is the burst. It will start like an intermediate down trend and can snowball. The investors need to be very cautious and should analyse a dip before terming it as only a correction. As the markets are at great heights and expectations are strong, the fall can be swift and dangerous. If the investor today is gamed to the gains, he should be conscious of likely losses. In the event of downturn, he may not get opportunity to liquidate his position fully or substantially but can only get out partially. In such a situation there can be losses everywhere albeit of variable degree. The losses can be painful and depressing. Be prepared for such dose of pain. It will come one day. Be prepared for such a situation both psychologically and financially so that it will be less traumatic.

Though the markets have expanded greatly and investors have made unprecedented profits, they should not change their lifestyle dramatically. It is essential to plan investment and lifestyle in the boom period. During such times the inflow of money is good and profits are plenty. Salaries rise fast. The asset values and so the net worth of an investor is on upswing. In the situation an investor can lose sight of difficult times. When the tide turns, the income can slide down fast. If an investor is over exposed or highly geared due to heavy borrowings, he may have to nurse higher losses. When liquidity is freely flowing in the boom time, there is a tendency to over borrowing for investment and consumption. During such days the lenders encourage people to borrow. There is no whistle blower. Everybody should protect his own interest.

For an investor there are two types of income. One is of a steady type like salary from employment or fixed income from interest on savings. The other type is from business, capital gains or even speculative activities. In boom times, total income looks large and that encourages borrowing for consumption as well as investment. People tend to borrow for buying bigger houses, bigger cars and other products, which are more for lifestyle than the need of life. Such borrowings can land the borrowers in difficulty when the times change. Wise people should improve their lifestyle only to the level, which can be sustained even in difficult times. Over enthusiasm can lead to grief and miseries for an investor and his family.

Stock markets

The stock markets all around the globe are on upswing. There are no signs of their relenting as of now. Though many investors may think that Indian stock market has crossed the fair price based on current fundamental, an expert may calculate projected future profits and justify how the stocks are cheap. Good growth stories do exist and exist in fair numbers. The investor need to be selective about the industry in which he wants to invest and even the company on which he is bullish. Do not plunge but be invested unless the slowdown is seen on horizon. Investor should try to analyse the quarterly result, which will be published in April and May. These results will decide the trend of the near future.

Properties

Property prices and specially the land prices are booming like never before. Even many non-prime areas have attracted heavy property investments. Rents are high and likely to remain high in the near future. Property prices may not turn south till the share markets are booming. The investment in property sector will slow down only when share market may show downturn.

Bullion

Gold and silver are currently ruling around their respective all time high. Precious metals have become more precious and so they are attracting investments. Though I do not recommend bullion as a major investment, it balances the portfolio of an investor. Investment in gold and silver and even in diamonds is recommended to the tune of around 5% to 10% of the portfolio value.

Debts and deposits

The rates of interests are hardening not only for short maturity but even for long tenure. Banks are now giving more than 6% interest for a short to medium term fixed deposits. The company fixed deposits are fetching better rates though the top class companies are not making retail borrowings. I recommend increase in debt exposure, though gradually. As the inflation is not very high, debt remains a safe and steady investment avenue. Fixed maturity plans and even liquid plans of various mutual funds are giving reasonable return though they are not comparable with returns on equity or property. Still such investment is a need of a balanced and health portfolio and specially at the time of high economic expansion.