Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Archive for the ‘Economy’ Category

Our India is not big

Posted by Muthu on June 17, 2018

I was reading this piece recently.

India has been classified into three as India 1, India 2 and India 3 based on per capita income.

There are 280 million households in India with a population of 1340 million, averaging 4.8 persons per household.

We all belong to India 1 for which details are given below.

India 1 has 23 million households containing 110 million people. The working members of these households are 31 million. So an average a household has 1.3 working people.

The annual per capita income of India 1 is US$8,800 (Rs.0.6 million).

Only 8% of India, 110 million people are upwardly mobile.

10 million iPhone users, 32 million car owners, 37 million credit card holders, 50 million post paid mobile users, 59 million tax payers, 65 million domestic flyers, 24 million international flyers and 20 million ecommerce shoppers; all belong to this top 8% of population categorised as India 1.

India 2 with 104 million people spread among 22 million households has per capita income of US$3000 (Rs.0.2 million). This is another 8% of India which is aspiring to move up to India 1.

India 3 with 1126 million people spread among 235 million households has per capita income of US$1200 (Rs.80 thousand). This 84% is poor of India struggling to survive.

India moving from low income to middle income over next 2 decades would increase upwardly mobile and aspirers.

Only 8% of India can even dream of achieving financial independence. Like many countries, only 1% of population may actually achieve it. We need to keep this in mind.

Also giving needs to be part of everyone’s financial planning. Focus on giving should be on par with consuming and saving. We definitely owe that to the less fortunate.

Posted in Economy, General | 4 Comments »

No Pain No Gain

Posted by Muthu on November 21, 2016

I received a document prepared by Franklin Templeton India on demonetisation. I found the same useful.

I’ve given the key points below. Please read the complete report for more details and better understanding.

1)Overall, we believe that the demonetisation exercise should help to accelerate financialisation of the Indian economy over medium to long term.

2) This measure needs to be seen in the context of other far reaching measures effected by the current government, including GST, Aadhar, Jan Dhan Yojana and Unified Payment Interface (UPI). All these measures put together should help in shifting significant portions of the informal economy (estimated at 40% of GDP) into formal economy.

3) This could in turn improve productivity by reducing frictional inefficiencies and improve the government’s tax revenues led by significantly better financial trails over medium to long term. These measures would give more flexibility for the government to manage fiscal deficit, as also potentially enable to shift to lower interest rates in India.

4) However, the demonetisation measure is likely to be negative for growth in the very near term until the level of cash in circulation reverts to normalcy. A sudden withdrawal of Rs.14 lakhs crore (9% of GDP) represents substantial monetary tightening, which could result in deflationary forces due to lower aggregate demand.

5) We believe that there exists a scope of 50 bps policy rate cut by the RBI from current levels over next one year, which may be undertaken in order to offset the deflationary impact.

6) Meanwhile, the flow of substantial cash holdings into bank deposits will mean that banking system will be flush with liquidity and CASA (Current Account and Savings Account) balances are expected to improve. As credit demand is likely to be muted for next couple of quarters, there would be very limited opportunities for banks to lend these deposits. The possibility of this money being channelised towards government securities may lead to a bond rally.

7) We expect aggressive rate cuts by banks, thus helping RBI in achieving better monetary transmission. The lower interest rates, along with a return to normalcy for cash in circulation should set the stage for a stronger recovery in aggregate demand in financial year 2017-18.

I wrote my last piece on the very next day of demonetisation. Now I’ve a better understanding of how benefit would accrue to government.

It is unlikely that the entire Rs.14 lakhs crore that was in circulation would come back to banks. Black money would be a sizeable part of this. The estimates range from Rs.1.5 lakh crore to Rs.5 lakh crore. There are some who argue that entire money would somehow find its way to banks. Even if that happens, the (earlier) untaxed part of that money would result in huge tax revenues for government.

For now, let us assume Rs.3 lakh crore does not come into bank accounts. That is the black money destroyed in this demonetisation drive. Government by necessary legislative changes can ensure that is no longer in the books of RBI as liability. As assets of RBI remain the same and liability is reduced, this excess Rs.3 lakh crore can be transferred to reserve. From reserves, RBI can eventually transfer the same to its P&L (Profit & Loss account) as income and then pay the same to government as dividend. Either government is going to tax and penalise heavily the unaccounted money coming to the system or it is going to get a hefty dividend from RBI or most likely a combination of both.

Thus black money is transferred from the hands of corrupt individuals to government of India.

Posted in Economy, General | Leave a Comment »

Good years are ahead

Posted by Muthu on April 16, 2016

It was good to get in touch with each of you for the year end review. I’m pleased with the results. Other than those of you who started investing during last 2 years; everybody else has done well. Those of you who have started a year or two ago, would start seeing better results in next few years.

I’m grateful that all of you have internalised the concept of SIP and sticking to the discipline through ups and downs.

I wrote in January that we’ve entered a bear market. A 20% fall from the previous high is considered as a bear market. Markets lost heavily in January and February. The interesting thing is that the market has started rallying in March and at the time of writing this, has recouped the losses made during the first two months. I wouldn’t be surprised if it crosses it’s all time high this year itself.

Globally things are not looking bright. India is considered as a sole bright spot in an otherwise gloomy scenario. As explained before, budget was very good. Government is sticking to fiscal discipline. Inflation is continuing to come down. RBI is targeting 4% inflation over next 2 years. As inflation comes down, interest rate is also continuing to fall. Recently RBI reduced the interest rate further by 25bps (0.25%). Good monsoon may lead to further interest rate cut. RBI, through various measures, is increasing the liquidity in the economy.

After 2 years of insufficient rains, an excellent monsoon has been forecasted for this year. Rajan, a man who measures his words, mentioned last week that Indian economy is on the verge of a revolution. Growth has started picking up in certain pockets. Corporate earnings growth are expected to pick up before end of the current financial year. The industrial production has started picking up. The seeds sown by the government and RBI for the last 2 years have started showing results.

Someone on Twitter mentioned that markets are influenced in short term by liquidity, medium term by sentiments and long term by earnings. Being the bright spot and offering stable growth, India would attract both liquidity and positive sentiments. More than these two, as earnings pick up; the long term growth story would be intact.

If we look at long term, the future of India, its economy and companies is extremely bright. Before end of the next decade, we may see India becoming a $10 trillion economy from the current $2 trillion. Good companies grow at a better rate than the overall economy. So we can expect around 15% annualised return from equity funds in the next 15 years. This means wealth getting multiplied by 8 times.

I feel that the future performance of economy and markets would be much better than past. I wish that both Modi and Rajan get at least one more term. The growth in economy and earnings may be more stable and less volatile. However markets, by its very nature, would continue to be volatile. The journey would continue to be bumpy. You would see many bear markets as well in next 15 years. However continue to focus on the bigger picture.

In every bear market you would come across people who say ‘buy & hold’ no longer works, equity is dead and SIPs are no good. Learn to ignore them. They would change their tunes in the next bull market.

‘Buy & Hold’ of excellent companies and good funds would continue to work. In India, equity would be THE asset class for next 2 decades. SIP is the best way for an average investor to participate and reap the benefits of equity.

The sceptics would never make any meaningful money. By being optimistic on future of India, you would create good wealth and become financially independent.

All the best.

Posted in Economy, General, Wealth | 4 Comments »

Accept short term pain

Posted by Muthu on February 14, 2016

Markets falling heavily during recent times would not have escaped your attention. This news is part of main stream media as well. I’m happy and grateful that you are all calm and staying the course.

Indian economy is in a better shape than it was few years ago. We’ve an excellent political leadership which is working for the betterment of the country. We’ve a visionary RBI governor who is in the process of cleaning and reforming our banking system.

The fall in the recent times is more of due to global scenario. India, though doing well, is impacted by fund outflow due to selling by FIIs. This may continue for some more time.

Lower crude prices and fall in other commodity prices is a blessing for India. If it continues so, we would be able to build our infrastructure at lesser cost.

Government and RBI are working in such a way that there would be short term pain but long term gain for the economy. The results of the reforms would be higher growth rate in the years to come. I would not be surprised if we are able to grow at 9% in the years to come.

The structural changes happening in the economy and banking system would pave way for many years of high growth.

Stock prices are slave to earnings. Earnings growth was expected to pick up this year and is getting delayed. Many opine that, in next financial year, due to lower base, we should expect an earnings growth of 15%. Once earnings pick up, markets would be able to sustain itself and grow. It’s earnings growth which makes or breaks equity.

For the reforms and infrastructure development carried out been 1999 to 2003, we saw an extreme high growth of earnings from 2003 to 2008. We may expect a similar high growth trajectory in next few years.

Modi and Rajan are working for a fundamental and structural change in the economy and banking system. You would have seen PSU banks declaring huge losses due to cleaning up of books.

When government and RBI wants to go through short term pain for long term gain, we the investors should also develop a similar attitude.

During bear markets, we get more units for the monthly investments we make through SIPs. As we always say, in stock markets, the ups are permanent and declines are temporary.

We would continue to make new highs in the coming years and decades, as the earnings keep going up. As I always say equity is for you only if you have faith in the future.

Despite some temporary setbacks, I’ve every reason to believe the Indian economy and corporate India would be in upward trajectory for next few decades. If that is the case, the markets cannot be far behind.

Avoid financial media, don’t look at portfolio and just stay the course. You would do very well over next few years.

Accept short term pain for long term gain.

Posted in Economy, General, Stock Market | 1 Comment »

If it takes time

Posted by Muthu on January 25, 2016

In the long run, growth in stock markets would be on par with earnings growth of underlying companies.

Markets would deliver only what corporate India can deliver.

Our earnings growth currently is not worth mentioning. It is expected to pick up in a year or two.

In the short run, markets can be ahead of or behind earnings. So it is difficult for anyone to predict whether markets would be up or not, in next 2 years. It can be either way.

Once earnings start going up at decent rate, we can expect the market to mirror it. Again markets are capable of both mirroring it in advance or with a time lag.

It is not possible for us to predict the timing of these. It is not required either. We are disciplined investors who invest regularly across business and market cycles.

The present government is taking many right steps which should start reflecting on the ground in one to two years.

Though I do not know how the markets would be for next 2 years, I would suggest you to keep the expectations low.

If markets perform well despite our lack of expectation, it is well and good.

If it takes time to start performing, let us utilize the opportunity to acquire more units every month at lower price.

The long term future of this country is good. There are many peaks which we would be scaling in the years and decades to come.

At the same time, we’ll continue to go through business and market cycles. No asset class can escape cycles. People who thought real estate and gold are exception to the cycles, now realise it is not so.

Remember in a long term growth story like India, declines are temporary and uptrend is permanent. The units we acquire in each decline multiply our wealth in next peak. As I said above, we would be scaling many new peaks in the coming years and decades.

All you need to do is to continue to stay the course.

So please continue to stay the course with no near term expectations.

As I always repeat, avoid the bad habit of looking at the portfolio regularly. This is true for any market more so for bad markets like these.

Completely avoid financial media. It would do you more harm than good.

Posted in Economy, Stock Market | 2 Comments »