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BW Businessworld

Look For The Bright Spots

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Even at the best of times, investing is an act of faith, and of optimism. From today's perspective, investing for 2012 seems even more so than usual. Of course, I am saying that for ‘investing for 2012' — ‘investing in 2012' is a different matter; more on that later.

There have been only a few earlier periods when the general mood among businesses and investors has been as pessimistic as it is now. The strange phrase, ‘worse than 2008' or the even stranger ‘worse than Lehman' are heard practically every day. Analysts seem to compete with each other to paint gloomier and gloomier pictures and 2008's ‘Dr Doom' Nouriel Roubini is a regular in the business media. This time around, he paints separate doomsday scenarios for different parts of the world. He has even favoured India with his attention, even though his pronouncement has just amounted to the almost banal ‘deficit needs to be reduced'. The only appropriate response to which is a sarcastic ‘What an idea, sirji.'

Anyhow, while I am all for having a realistic outlook at all times, I think extreme pessimism or optimism can generate their own reality. If people act as if things are going to be bad and take business and investment decisions based on that, then that will become a self-fulfilling prophecy. If businessmen don't feel like investing in their businesses and investors refuse to put money into equities, then these decisions will end up justifying themselves. And if everyone is doing that, then the prophecy will come true that much more strongly. Of course, the reverse is also true.

Some time back, I read about this interesting psychology experiment that showed how people would become more cheerful if they were forced to smile. The experimenters asked their subjects to read a comic while holding a pencil in their mouth. One group of the subjects was asked to hold it in a manner that — without them realising — would make their lips take on a smiling shape. It turned out that people whose lips were in a smiling position found the comic much funnier and reported feeling more cheerful after reading it. It is interesting to note that these people were not even forced to smile — they just unknowingly contorted their lips into a smile and that apparently made them feel more positive. This is not one of those ‘power of positive thinking' things; it seems to be an actual physical affect. India's business and investment environment could do with a little more optimism, even if it is just the equivalent of contorting your lips into a smile. Seeing the glass as half empty or half full is a tired old cliché, but like all clichés, it became one because it is true.

As far as the actual investment scenario goes, any reader of this magazine knows the whole story — sagging profits, stubborn inflation, government deficits, and more tear-jerker episodes of the European soap opera. However, it still seems likely to me that we are in a phase of irrational melancholy — the opposite of Alan Greenspan's much maligned irrational exuberance. There is no rationale for this universal sadness. There are plenty of bright spots around the world. In fact, this could be as good a time as any for Indian investors to start looking beyond India's borders and invest globally.











HOT SPOT: As far as single markets go, Brazil could well be the healthiest (Bloomberg)

As for those bright spots, the biggest of them could well be the biggest one of all, US stocks. Almost unnoticed, there has been a confluence of effects which have rendered this more likely than not. US businesses have been able to reduce debt while increasing output. Industrial output has now grown continuously every month for more than two years — something which few other parts of the world can boast of today, not even China. The US dollar appears to be in a long-term uptrend, helped by the interaction of both forces — strength in the US and problems elsewhere. Despite all this, US stocks have not really woken up and smelt the coffee. During 2011, stocks were basically flat and could well be primed for a good year.

The US is not the only likely bright spot. If you spin the globe carefully, your eyes would do well to pause on Brazil. As far as single markets go, Brazil could well be the healthiest in the world. Brazilian stocks are available at low valuations while growth is more robust than many other markets with higher valuations. The icing on the cake is that for a variety of reasons, dividend yields are high in Brazil. Over many decades, Brazilian firms have been high dividend payers.

The good part is that Indian investors have targeted mutual funds available for such investments. For the above two examples, there is Motilal Oswal's MOSt Shares NASDAQ-100, which is an ETF based on the NASDAQ. HSBC runs a Brazil-specific fund in India. There are other targeted international funds as well. I am not saying that these are the only international ideas, nor that Indian investors should focus exclusively abroad now. However, what is undoubtedly true is that given the conditions — and given the availability of options from Indian mutual fund companies — investors must routinely evaluate international options.

However, there is nothing 2012-specific in this and nor should there be. An investment strategy that is suitable for one part of the calendar and unsuitable for another would be pretty much useless, actually. So on the question of the actual investment strategy that an individual investor should follow during 2012, that is no different for this coming year than it would be for 2011, 2013, or any other year.

Investors should map their future financial needs along a time-scale. We all need some emergency funds but apart from that we can generally predict our financial needs with reasonable accuracy over the next decade or so. This should be the guide for asset allocation. All money that could be needed in the next two years or so should be kept in fixed income investments. These could be government small-savings schemes or debt mutual funds or something similar. The only requirement is safety and liquidity. Beyond this horizon, all investments intended for a longer period should be invested in a small (four or five, at most) number of diversified equity funds and balanced funds. These funds should be chosen for a long track record of good returns with low risk. The Value Research Fund Rating system makes an excellent starting point for picking the most suitable fund.

These investments should obviously be made not in fits and starts but gradually, using an SIP (systematic investment plan). This would give investors a low average cost of entry as well as ensure that they do not try to time the market. These time horizons are a sliding scale. So as you get nearer to the point of time when you would need a certain quantum of funds, you should move it into safer fixed income options.

This strategy is simple. It does not have to be reworked based on the investment environment and the calendar.

(This story was published in Businessworld Issue Dated 23-01-2012)