Markets are too high, I will wait for them to cool down before I invest. Nifty broke 10,000 and Sensex is at 32,000, is it too high? We’re in bubble territory for sure. Markets are in an overdrive—this ends badly. Markets are looking ahead and pricing in the structural reform the government is doing. Goods and services tax (GST) will cause markets to drop in the next 2 months—we’re just a few days away from a crash. Market is pricing in the long-term benefits of more taxpayers, less black money and better compliance due to GST.
Listen to the voices about the market and you’d imagine people are talking about two very different things. There are two voices that we hear today—one believes that we are already in a stock market bubble. The other believes that small corrections will happen, but we are in a long-term bull run.
Getting those real estate itchy fingers? Stock markets have been on a roll and the upswing in markets is usually a precursor of a jump in real estate prices as investors book profits and sink their money in land. The breathless expectations from a new real estate regulator, combined with an overall upswing in the mood of the economy, is making people begin sniffing the air for real estate deals one more time. One more time I write to caution real estate aspirants, specially those who cannot deal with the clunkyness of the asset, against jumping in. Of course, it still remains a really bad investment at current prices when you compare it to alternatives.
The middle-India push-back (http://bit.ly/1Udgm4P) on the government’s plan to tax the Employees’ Provident Fund and reduce rates on small savings products tells us that despite frothing at the mouth against the government during the day, finally, when the dust settles, we love the role of the government as an asset manager. What do we want? Ideally, government-guaranteed returns with no risk. So why don’t we buy government securities (G-Secs) directly? Because of the way the intermediation (link between savers and investors) market is constructed. Maybe it is time for this to change. We’re ready for G-Secs going direct to the public. But first, the background.
Ask any group of people what gives the highest return and nine out of 10 will say: real estate. The 10th will name gold as the next best investment. Mention stocks or equity and the response is either hostile due to the stock market related scams (including the unpunished scam of unit-linked insurance plans) or fearful. Every time I’ve spoken to a group, I get the same response: a sure-thing with real estate and gold, and an overall feeling of mistrust with equity. Let’s unpack this a bit. Let’s look at return rates. I will do this in two parts. One, historical returns. If we begin with the Sensex at 100 in 1979 as a starting point for a meaningful comparison and look at returns across the market, real estate and gold, we get a positive return for all three. Investment in gold from 1980 to 2014 (I got gold prices in Indian rupees off gold.org) returned 11%. Investment in the Sensex returned 17% over the same period. Tracking real estate is tougher due to lack of data series and due to location issues. So I picked the village where buffaloes bathed turned boomtown of Gurgaon to see what the price change has been. Speaking to original inhabitants from the 1980s of what is now DLF City, I get rough rates of Rs.2 lakh investment turning into Rs.2 crore over 34 years, or an average annual rate of growth of 15%. Just to put it in context, I looked at Reserve Bank of India data and got an average annual return of 9% on a five-year fixed deposit (FD) across the same time period.