Strategy for the dream run

The current upward move in the Indian economy can be called as a historical dream run. Independent India never had it so good. The boom is caused by number of factors such as opening up of the investment to foreigners in Indian economy and stock market, the liberalized foreign exchange law and other policies, success of India and Indians in the knowledge segment such as software and BPO, etc. India has leveraged the advantage of cheap labour and English language to grow fast in BPO business. The recent thrust of infrastructure development has given further boost to the growing economy. Now the question comes to my mind is why the Independent India wasted its first 50 years to realise its strengths and why the economy could not get direction earlier? I solace my anguish by remembering the mythological statement that right time has to come for things to happen. Probably the right times have come and we are lucky to witness them.

The growth in Indian economy is happening in spite of very high petroleum prices, which is a great economic drain. The global growth, in spite of higher and higher petroleum prices, is an unknown phenomenon for the old economic theory. The high petroleum prices should have caused recession. However, the global economies have demonstrated just the opposite movement. What has triggered this unexpected movement is a complicated economic question.

I feel that high petroleum prices have triggered huge super profits for oil exporting countries. They have partly spent the money in their own infrastructure development and partly invested the money in the global markets including commodities, precious metal and real estates. The global fund managers have become flushed with funds and they need to deploy the money in meaningful way. As the markets in developed countries were matured and growing slow, for better returns, the fund managers and even the companies in the developed countries who were beneficiaries of this fund flow by way of investment and profits, diverted the funds to the developing economies which were showing faster growth on lower economic base. Lot of new allocation was granted to the BRIC (Brazil, Russia, India and China) countries, which are large economies. The investment in these and other developing countries created demand for technology and infrastructure, which in turn gave orders and economic growth to the developed countries. So the situation becomes win-win to all. It has become a classical case study of free economic model.

This newly emerging economic model still has steam left but some worries have becoming visible on horizon. The high petroleum prices and high commodity prices are cause of concern. Inflation has started rising globally and so are the interest rates. I expect that the developed economies will grow slower in 2007 than 2006. The current speed of global growth may not be sustainable beyond 2007. The slow down is inevitable but it has still not begun.

In the current phenomenon, caution is a better approach. Control of greed is very essential. A couple of investors asked me a question whether they should sell all their stocks today and invest the money in the debt to secure regular income? It may be a right strategy if the investor had set an economic goal for his asset value and he has achieved that. In such case, the investor can be governed by his personal goal and not by the markets. He can cash his gains and opt for steady returns in debt related instruments. I call this as a retirement from active investment. It is a good strategy for those who are less adventurous and less enlightened. For others, the opportunities still exist.

Though the upside exists, investors need to be careful in selecting investments especially in stocks, properties and even commodities. Individual commodities can be the most volatile amongst the investments. The investments in property, precious metal stones, commodities and even currencies do not grow on their own. They grow in value due to the demand supply equation and also based on the currency in which their values are quoted. On the other hand stocks grow on corporate profits and debt yields interest. Both these investments have inherent returns based on time factor. The investments in commodities and currencies are speculative investments and they are made when the investors expect the demand to outpace the supply due to which prices are likely to grow. I feel that investors should now on concentrate more on stocks and debts than other avenues of investment. When the fall gets triggered, the assets such as commodities and properties may lose their value faster. Further, the cost of transactions of such investments is higher and spread can be larger. The comparative liquidity can as well be less. It may be wise to avoid speculative investments in this heated market.

Currently, the investor may remain put on the same investment pattern which he has patronized and major reshuffle may not be desirable. Incremental investment can be in debts and stocks. There can be some hedging by investment in bullion as well. For small lots of funds and for small investors, fixed deposits can give safe and reasonable return.

Though India is consistently adding to its foreign exchange reserves it has not resulted in strengthening of rupee against the other major currencies of the world. The US Dollar has shown unexpected strength due to continuous increase in the interest rates. Though the US is overspending, its currency is not showing any weakness. The growth figures of US are still looking good, though the economy is expected to slow down. It is now felt that US Dollar may remain steady for at least some more time. The Pound Sterling and Euro are strengthening against Indian rupee. Now it is expected that these currencies will stabilise against the rupee, unless the petroleum prices go up further. European economies are showing strength but if the US slows down, the Europe will follow it within a period of six months to one year. Outlook for Asian currencies is fairly strong and major Asian currencies except HongKong Dollar may strengthen against US Dollars in the next one year. Being control by the Government the movement of Chinese currency is difficult to predict. There is a pressure on China to revalue its currency but China has not relented so far. On the other hand it is trying to balance the excessive foreign exchange reserves created due to huge trade surplus by increasing its imports of raw material as well as materials for consumption.

The investors need not only look at investing in traditional investments but knowledgeable investors will have trading opportunities as well. Derivatives of stocks and commodities are per se not investments but they are speculative or hedge products, based on their user by the investors. For well-read investors, such hedge products can give good opportunity to safeguard their investment positions as well as to make some extra money. A beginner in derivatives should start with only futures. Options are much more complicated and need more thorough knowledge of the product.