Wise Wealth Advisors

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

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Archive for the ‘Economy’ Category

Understanding real returns

Posted by Muthu on January 17, 2016

Anand Radhakrishnan, CIO- Equities, Franklin Templeton mutual fund said the following in a panel discussion:

“Secondly, Sir John Templeton said focus on post-tax real returns. In India we focus a lot on nominal returns. If RBI is indeed successful in its inflation objective of 4%+ or -2% and the world is anyway reeling under zero inflation or a deflationary circumstance, it is quite alright to have lower expectations on nominal returns. If the economy is growing at 5%, 6% or 7% and then inflation is at 4% or even less, return expectations are still pretty high when investors walk into equity funds.

Focus on real post-tax returns, which is I think is going to be very different over the next five years than it was in the last five. Not in terms of real returns, but in terms of nominal returns.”

We’ve seen how Sensex has delivered around 17% over last 3.5 decades and CRISIL AMFI equity fund index delivering around 22% in last 18 years.

As you are aware, our long term nominal growth has been around 15%. This includes a real growth rate of 7% and an inflation rate of 8%.

In the long run, let us assume we would grow at 8%. Let us also assume the inflation would settle down at 4%. If this is the case, the nominal growth rate would settle around 12%.

When the nominal growth rate of the economy falls, the nominal growth rate of equity also falls. So instead of 18%, we may need to tone down our expectations to 15%.

But real growth rate, which is what relevant to us, would remain the same or marginally inch up higher; as real growth component increases and inflation reduces in the nominal growth.

If you notice, MIPs over the long run have delivered around 2% more than fixed deposits. As FD rates fall, the nominal returns from MIPs also would fall. But it would still deliver around 2% more than FDs due to active debt management and equity kicker.

So nominal growth rate is not static. It depends on real GDP growth rate and inflation. We may need to adjust our expectations in line with nominal growth rate. But the real growth rate would remain the same.

Nominal growth need not only go down. It can go up as well. It is a function of what is the real GDP growth rate and inflation.

Learn to accept the following returns from asset classes over long run:

Fixed Deposits: Inflation + 1%

Gold: Inflation + 1.5%

Real Estate: Inflation + 3% to 5%

Equity: Inflation + 7% to 9%

Actively managed fund would deliver couple of percentages more than index.

So if inflation is 4%, markets may deliver around 13% and equity funds would deliver around 15%.

Likewise, for an inflation of 4%, FDs may deliver around 5% and MIPs around 7%.

Please note that none of the above is guaranteed returns but only used as an illustration to explain the relationship between inflation, nominal growth rate and various asset class returns.

So start focusing on real returns, this is what matters to you as an investor.

Posted in Basics, Economy, Mutual Funds, Stock Market | 2 Comments »

Right direction

Posted by Muthu on September 30, 2015

As you are aware, we’ve always been very bullish on the future of India.

We were growing despite not having a good leadership.

We now have an able and effective leadership as well.

According to FT data service, in the first half of 2015, India has become the number one FDI (Foreign Direct Investment) destination in the world.

According to World Economic Forum, in global competitive ranking, we have moved 16 places from 71 to occupy the 55th position.

Steep fall in global commodity (including crude) prices has put us in a sweet spot.

We have a great central bank governor. He was the key in pulling us out of 2013 crisis. Though rupee has fallen to dollar during the last 2 years, it has gained across every other world currency. Not only that when other emerging market currencies faced a rout against dollar, our fall was very less.

Rajan has been focusing on’ killing the inflation forever’. From double digits two years ago, CPI inflation is expected to stabilise at 5.8% in January 2016 and at 5% in March 2017.

Interest rates have been falling and are expected to fall further in the medium term. It would not be a surprise if we become a low inflation and low interest rate economy.

FD rates are around 7.5% and may fall even to 6% in next 2 years in line with above.

Small savings interest rates also would start coming down.

Equities tend to do very well in the falling interest rate scenario. Debt oriented funds like MIPs also would do well over next 3 years.

Prime Minister wants us to focus on becoming a $20 trillion economy from the current $2 trillion. I’m confident that this would happen over next 2 decades.

Our GDP per capita is a meagre $1600. Even China’s per capita and GDP is 5 times that of ours.

We are growing from a very low base and hence would grow at a higher rate for next 2 decades to come. If one can have right temperament, be patient and stay the course; investing in Indian equities is a no brainer.

Equities would deliver phenomenal returns in the decades to come and we are moving in the right direction.

All that is needed is participation in the journey and staying the course.

Posted in Economy, General | 2 Comments »

Good years are ahead

Posted by Muthu on January 15, 2015

Wishing you and your family a very happy Pongal.

RBI has given us all a Pongal gift. It has cut repo rate by 25 basis points (0.25%).

Raghuram Rajan has been very clear that he would start cutting rates only when he is confident that inflation has permanently come under control and the government follows a good fiscal discipline.

He had a target of 6% inflation for January 2016 and is now confident that the same would be achieved and maintained. He envisages a long term inflation of 4% (+) or (-) 2%. So it would be in the range of 2% to 6%.

In the last 17 months, Rajan has done a wonderful job in bringing down the inflation under a firm control.

Rajan has also made it clear that his monetary policies would be consistent. Once he starts cutting the rate, he is likely to move only in the same direction. So we are heading for a low inflation- low interest rate regime during next few years.

As inflation is getting lowered and interest rate comes down, investment cycle in the economy would pick up. Profitability of corporate India would go up. Margin expansion will happen.

We expect a phenomenal performance in both equity and debt instruments in the years to come.

You’re all very disciplined equity investors through SIP. You’ve already started experiencing the rewards for your discipline. You may not fully realise yet what kind of rewards are awaiting you in the years and decades to come.

Other than emergency fund, we’ve been asking you to keep the FD (Fixed Deposit) money in MIPs (Monthly Income Plans). Those of you who listened to us have already been rewarded well in the last few months. For some of you who may be waiting, even now it is not late to consider MIPs. MIPs are any time product. We expect an above average performance from them in next few years.

Good years are ahead for our country, economy and markets. Increase your participation by increasing your SIPs.

Thanks to Rajan for giving such a sweet gift on Pongal.

Posted in Economy, General, Muthu's Musings | Tagged: , , | 3 Comments »

Good days will continue

Posted by Muthu on November 28, 2014

We’ve been writing how both favourable macro factors and this government’s right steps are bringing good days for the country.

In yesterday’s OPEC meeting, it was decided not to cut the oil production despite recent fall in their prices. As I write this piece, the Brent crude is trading at around $72 a barrel, fall of close to 7% in a single day. If you recollect, crude was trading at around $115 a barrel few months ago.

U.S. Shale gas is a biggest threat to OPEC and to discourage its production, OPEC has allowed crude prices to fall. Many analysts are now predicting Brent crude falling up to $60 a barrel. They also opine that the ability to produce shale gas would act as a deterrent to rising crude prices in future. If there is no major change in geo political situation, it looks like lower crude prices are likely to continue in future.

This is great news for India. Already petrol and diesel prices are market regulated. There is no longer any subsidy on the same. Inflation has been falling for last few months and lower crude prices would ensure its continuity. There is no need to worry whether or not RBI would cut rates in December. If not December, it may happen in February or April. It is now the question of when and not whether. The direction is very clear.

Using this opportunity, government has already capped subsidy for domestic LPG at Rs.20 a kg. Not only that, from April 1’st 2015 domestic LPG would be sold by dealers at market prices and consumers has to claim the subsidy which would be directly credited to their bank accounts. This would greatly reduce the slippages and streamline the LPG subsidy.

All the above would have major positive impact on fiscal and current account deficit. Fiscal prudence would get us better sovereign ratings. Falling interest rates would revive credit growth. This would help our economy and corporate earnings to grow.

Raghuram Rajan has been doing a wonderful job as RBI governor. RBI has yesterday published rules for payment banks and small finance banks. This would ensure financial inclusion happens really rather than mere opening of bank accounts for the unbanked. The face of our whole banking industry is likely change in the years to come.

These steps are revolutionary in nature in ensuring the reach of banking to the entire country. Financial inclusion would further aid growth.

So good days will continue.

Some people accuse the government of merely being lucky (i.e.) being in the right place at the right time. No doubt luck is also helping them but we cannot under estimate the right steps government and RBI has been taking.

The answer to critics is that it is better to be ruled by lucky people than unlucky ones.

Posted in Economy, General, Muthu's Musings | Tagged: , | Leave a Comment »

Kostolany’s Analogy

Posted by Muthu on November 9, 2014

Andre Kostolany (1906 – 1999) is considered as the guru of stock market in Germany. He is respected for his insights and wisdom. Unfortunately not much about him is available in English. I want to share one of his analogies with you.

The relation between stock market and economy is like a man walking his dog. The man walks slowly, the dog runs back and forth.”

Whether it is Warren Buffett or Prashant Jain, they explain how growth in the economy and stock markets are inter- connected over long run. This is true for markets as a whole though some companies or sectors may be an exception.

Growth in our economy impacts the earnings of Sensex which impacts its price levels.

As per Kostolany’s analogy, economy is like a man who walks slowly and steadily. Stock market is like his dog with which he is walking with. The dog would run some time ahead of him and some time behind him. But they travel and reach the destination together.

Samir Arora (https://twitter.com/Iamsamirarora) in one his tweets has mentioned that between financial year ending 2002 and 2014, the earnings of Sensex have grown at a CAGR of 15.40%. During the same period, Sensex has delivered investors a return of 16.98% (including dividends). Though he has not mentioned it, our nominal GDP growth rate during the above period is also around 15%+.

I’m bullish on the future of our country. We would reach 8% growth rate in next few years and may even touch double digit growth rate before end of this decade. We are expected to overtake China (in terms of growth rate) in next few years.

Our nominal GDP growth would continue to be around 15% to 16%. So Sensex earnings and growth rate would closely follow this. As I’ve mentioned earlier, good funds and quality stocks would do much better than these numbers.

We tend to focus on the dog more than the man. Look at economic growth and Sensex earnings instead of constantly worrying about Sensex levels. As Buffett says, to win the game one has to play well and not keep looking at the score board.

The man would go a long distance in next 2 decades. The dog has to follow him. Don’t keep wondering why it is running ahead or behind. That is the nature of the dog. The control is with the man. It has to follow him.

Thanks to Kostolany. I had something to share with you today:-)

Posted in Basics, Economy, General, Stock Market | 2 Comments »