May 7, 2018

Book Recommendation- Being Mortal - Atul Gawande

Atul Gawande is an American surgeon and writer. He begins this book with a very interesting and important question- 'How long should we go on prolonging life?'. While the subject itself might sound morbid, Atul takes us through real life cases of patients with terminal illness and builds his case very positively and convincingly.

The main theme of his philosophy in tackling this important question is 'autonomy'. He defines autonomy as the ability of a person to live life as per his/her terms. Atul uses live research in support of his thesis. I'm just listing some of his findings (this is from memory and not comprehensive)-

1. We define 'living' as our ability to make choices (however trivial!). We generally prefer to increase our choices rather than reduce them. 
2. We make better decisions when we know and prepare for the worst outcome. More specifically we should not focus decisions only on the best outcome.
3. We need to look at probabilities before taking decisions. 
4. We also need to look at the 'outcomes' of these probabilities. Quite often we find that in the blind pursuit of saving 'life' we get in to outcomes where the patient might actually not have 'much of a life' after treatment.

I found this book very insightful and useful not just from a general life perspective but also in the way I approach Wealth Management and my interactions with my clients and colleagues (both seniors and juniors). I would recommend this book to anyone who's struggling with philosophical questions such as- "What is life?", "What does it mean to live?", "What does it mean to live life well?" and others.   

Jan 12, 2018

What to expect from your investments this year

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

With that witty quote from the great man as the opening, let me go on to break-up where we expect asset classes to end up this year based on predominantly long term as well as some short term trends. Please note that this will be a slightly long read.

For most investors 2017 has been the year of equities. The major large-cap indices have been up close to 27% for the year. Several indices such as Infra/ Realty/ Small & Midcap have rallied even more. While we may all speculate as to what has been causing the rally (there is plenty of talk around GST/ Demonetization/ Reforms/ Bank Re-Cap/ Political Stability/ etc.) the data below will be quite revealing-
FII Inflows Net
DII Inflows Net

*FII- Foreign Institutional Investors, DII- Domestic Institutional Investors
Source: BSE India

What we are witnessing is large-scale in-flows in to the equity markets from within the country. This is unprecedented and has left most experts stumped. The probable reasons for this could be-

1.      Recency Bias- Equities have delivered decent returns over the last few years (especially since 2014) thus emboldening investors.
2.      TINA (There Is No Alternative) Factor- Interest rates are low, Real Estate is in the doldrums after Demonetization and RERA and gold has simply gone nowhere for the last 3-4 years.

These domestic in-flows are a momentum by themselves and could spur the markets even higher. We generally see that these kind of momentum plays last till a major bad news event. We generally believe that this domestic momentum should play out till the 2019 General Elections at a more subdued pace than we have been used to over the past year.  
Donald Trump’s new tax policies will mean a lot of money (FII) will go back in to the American markets. This means there will be less money available for other markets (including India). This also suggests a slow-down in the pace of growth of the markets over the past year.

"In the short run, the market is a voting machine but in the long run it is a weighing machine"


-          Benjamin Graham

Broad market earnings have not kept up with the movement of the markets themselves. Therefore by traditional measure such as PE the markets are over-valued. This should correct. Keeping in mind the momentum in in-flows and also that markets are over-valued we expect that the markets may not correct substantially at this point. We also expect that returns will be lower than what we’ve experienced in the recent years. It will be safer to play large-caps and sectors that have been performing not-so-well recently (like IT or Pharma) to other sectors or strategies at this point of time.

The debt markets have been extremely volatile over the past year. Most debt portfolios would have delivered very low returns (average around 5.5%) over the past calendar year because of mark-to-market losses in the underlying. Inflation has been inching up. With a general election due in less than 18 months (where we expect the Govt to be more populist and accommodating) and also crude oil prices rising we expect interest rates could go up. This will have a negative impact on your debt portfolios. We have been lucky in that we have been collecting a lot of money in liquid over the past year. Liquid funds have been the best performing of the debt categories (and this has happened purely by accident!). We will have to be very careful in how we play the debt markets in the coming few months. We expect we will have to average out our short term positions over the next year. But yields will be better.
From a home-loan perspective there could be small drop from these rates currently. But, it is likely to remain there and thereabouts for the year. If inflation spikes we could see an upward revision in interest rates affecting your loans.

Real estate should continue to be subdued. There is a lot of regulatory back-log (in terms of RERA/ Land Registration etc) that will continue to adversely affect prices. It could be a decent time to pick-up a property from a safety perspective (as in prices might not come down substantially from these levels). We however don’t expect real estate as a broad asset class to do too well over the next few years. Buyers will have to be patient with their purchases. Of course with Real Estate a lot of the investment value and risk perspective has to be looked at from the particular property under consideration.

We expect the Indian rupee to depreciate over the year. We expect that it will touch close to 70 to the USD. This is on account of a strengthening dollar (Trump’s Tax Plan) and also higher inflation in India. NRI’s and ESOP holders (of US or other foreign shares) should keep this in mind while making investment decisions.

We expect that gold will do slightly better than it has done for the past few years domestically. Internationally we don’t expect too much movement in the price of Gold. This is because we expect that general international investor confidence to be high after the tax cuts.

We expect that oil will continue to move up and push close to $70-75 per barrel. Once it crosses $70 India’s current account deficit will be under pressure pushing up inflation and possibly interest rates.

Finally we will discuss a little about the rise of Bit Coin and crypto currencies in general.

“I could calculate the motions of the heavenly bodies, but not the madness of the people.”  
-         Sir Isaac Newton

This quote is attributed to Newton after he lost a lot of money in the South Sea Bubble. We have no doubt that crypto currencies are a bubble. How long this is going to last is anyone’s guess. We generally prefer to buy investments once they’re beaten down (when the risk premium is low!) to when the prices are inflated (when the risk premiums are high!). We would recommend that lay speculators avoid crypto currencies in general and leave it to the hands of experts.