Just as the lower end of Indian investors (more like savers actually) used predominantly debt asset class, the higher end stuck to a combination of debt and equity. Over time, real estate also found way as a stable and "real" investment avenue.
All along, however, the investments were exposed to the same set of drivers in terms of value - interest rates, economic growth, monetary policy, exchange rate.
The Indian investor is now waking up to the potential of alternate assets in providing truly diversified returns over a long term. The word truly is based on the observation that within equity markets, you can only do so much of diversification. After all, most of the stocks tend to move together, if you actually draw up the correlations across blue-chip stocks, you are unlikely to find many low correlation options. In the domain of diversified funds, the correlations are even higher.
For an investor willing to take on risks, there was not much of a choice beyond equity till recently. However, increasingly the asset classes such as private equity, venture capital, gold (and other commodities), real estate (more through professionally managed funds) and even hedge funds are catching the attention of investors and investment consultant alike. The reason is straightforward, these asset classes have very low correlation with the traditional asset classes like debt and equity.
One reason for this low correlation is fundamental factors driving the asset prices (in case of commodities and real estate) and in some cases the reliance on the fund manager's skills to generate returns. The different between the mutual fund manager and hedge fund manager is that a large part of the former's returns are explained by the market movement whereas the latter strives to generate market neutral and absolute returns. Likewise, private equity fund manager tries not to diversify away the single stock risk but actively seek it to maximize his returns - his fortunes though somewhat linked to market, are not dominated by general stock market movements (unless they are extreme). The movement is clearly towards skills based return generation.
The trend is similar to one seen in the developed markets. As of now, the developed markets have debt returns not more than 5% at best and the equity returns of 10% are considered quite acceptable. The promise of active fund managers to deliver returns above this has drawn investors to park part of their risk capital with these growth opportunities.
As the Indian stock markets growth numbers come more within the usual ranges of nominal GDP growth + 5-10%, the Indian investors will also start seeing greater value in
seeking returns beyond the market - not above or below but simply beyond. So that they have a return generation avenue independent of the markets.
Alternate investments reduce risk of a given portfolio for a given target return rate. Seen from other side, they increase returns for a given level of risk. The basic argument is built along the lines of efficient portfolio frontier. The more diversified the portfolio, the lesser the risk. The diversification can happen at multiple levels - asset class, geography, within asset class and so on.
The quest for efficient investment management will lead people to seek newer avenues of making the best of their money. Alternate investments of today will become the mainstream of tomorrow and there will be a new set of "alternate" investments! So is the story of economic growth!
Friday, May 25, 2007
Saturday, April 07, 2007
Capital - and the imminent oversupply of it
I often wonder what will happen to the ever-growing stock of capital in the global economy. I mean, it is one thing that hardly decreases if at all and through professional management is generating more returns than ever before. Especially in a globally integrated economic order, opportunities to generate decent risk adjusted returns on capital are likely to find a lot of takers. With the integration going up with time, often aided further by technology and the zeal of professional fund managers to locate new opportunities.
I am not exactly worried but am just curious about what may happen to this huge stock of globally mobile capital. Will return on capital inevitably come down as a secular trend. Companies will increasingly run out options to invest and will hand over the extra cash to shareholders who would not need much of it for consumption and would invest it elsewhere - only to be told that there are not many opportunities there either. Inevitably they will settle for lower returns and the cycle would continue - till such time that the capital is almost freely available and no-one really has an incentive to postpone consumption. People will save only for rainy days or contingency. Capital will be held by mighty corporations which will jump at any opportunity to generate that 1% return. There would of course be not much of investment. Is this likely?
Or is it that the cost of capital - though it would come down - would never go below a certain level. Savings rate globally would drop but people will still save in large absolute quantities since the incomes will be much larger. The investments would then only be in technological upgradation and productivity improvement since in this world there would be equilibrium in terms of what it produces and what is demanded. Can it ever happen? Can the thirst for consumption be fully satisfied? Will organizations try to generate consumption demand to sustain their growth? Or will consumption shift to higher margin higher price activities such as leisure, spiritual upliftment etc?
My take is that the manufacturing sector would reach a steady state - with little investments required save new technology. Services will stabilize at a higher level. And then there would be a race to innovate businesses and services which satisfy needs of the next order. Consumers will have moved to much higher levels of maslow's heirarachy.
Even if that be the case, it would be driven by services which will be very capital light. So where will the capital go?
Unless major space expeditions are taken up, there does not seem to be much of use for it, does there? In fact, an excess of capital itself could bring in the age of space expedition as a business!!!
I am not exactly worried but am just curious about what may happen to this huge stock of globally mobile capital. Will return on capital inevitably come down as a secular trend. Companies will increasingly run out options to invest and will hand over the extra cash to shareholders who would not need much of it for consumption and would invest it elsewhere - only to be told that there are not many opportunities there either. Inevitably they will settle for lower returns and the cycle would continue - till such time that the capital is almost freely available and no-one really has an incentive to postpone consumption. People will save only for rainy days or contingency. Capital will be held by mighty corporations which will jump at any opportunity to generate that 1% return. There would of course be not much of investment. Is this likely?
Or is it that the cost of capital - though it would come down - would never go below a certain level. Savings rate globally would drop but people will still save in large absolute quantities since the incomes will be much larger. The investments would then only be in technological upgradation and productivity improvement since in this world there would be equilibrium in terms of what it produces and what is demanded. Can it ever happen? Can the thirst for consumption be fully satisfied? Will organizations try to generate consumption demand to sustain their growth? Or will consumption shift to higher margin higher price activities such as leisure, spiritual upliftment etc?
My take is that the manufacturing sector would reach a steady state - with little investments required save new technology. Services will stabilize at a higher level. And then there would be a race to innovate businesses and services which satisfy needs of the next order. Consumers will have moved to much higher levels of maslow's heirarachy.
Even if that be the case, it would be driven by services which will be very capital light. So where will the capital go?
Unless major space expeditions are taken up, there does not seem to be much of use for it, does there? In fact, an excess of capital itself could bring in the age of space expedition as a business!!!
The much hyped asset bubble and flawed monetary policy of RBI
Indian economy thesedays is characterized by a quiet revolution - growing investments, growing confidence and growing aspirations. There is - almost as a byproduct - much talk of an asset bubble. A friend of mine summarized the underlying feeling behind this bubble to me the other day - "I feel uncomfortable with the slope of growth curve". This to me seems the primary driver of the perception of the so called asset bubble in India today.
Nobody is quite keen on examining the fundamentals. And of course with selective perceptions there are always events to justify one's stance. My personal observation is that the talk of bubble is stemming from the inability of most Indians to deal with their country's potential. It is the inherent discomfort with non-linear growth however robust it is. One such Indian also happens to be the governor of the reserve bank and has used his power to revise downwards what has been a fairly robust growth story.
There has always been much of comparison between india and china. A key difference often cited is the difference in the governance model. In addition to that, i believe there is a deep rooted difference of attitude. Chinese attained 10% growth sustainably over the decade partly on account of the reforms, partly FDI and partly the sheer confidence to bulldoze growth through resistance to it. Indian policy makers on the other hand get fidgety if growth numbers start to look above their mental blocks. 9% is enough, now let us focus on inflation instead - is the wisdom. Very counterintuitive to me. India has tried the license permit raj for long enough to know that growth is the starting point of any hope for elevating millions of its populace out of poverty. The desperation to control inflation looks more politically driven than by sound and ambitious policy making. India was just poised to break free of the lower orbit growth rate of 6-7% and move to a much useful 10%. But 1% too much inflation was enough to rattle our policymakers into slamming the brakes on a decently accelerating car. Cowardly by a long shot.
The issue is that the growth impact takes much too long to show its benefits while inflation bites much earlier. And makes politicians lose elections as well. I would not be surprised if the real wages have indeed remained constant and have in fact gone up during last three years. If that be the case, who is really worried about inflation - especially if it is tiny 1% more than the "comfort zone" - much arbitrarily defined. Agreed, too much of inflation redistributes wealth - typically against the poor. But reducing growth is making everyone pay as much or more price. It is the age old mantra of keeping everyone poor in a bid to increasing equality. I do not care much about equality. I worry more about the absolute standard of living of the poor. If that is above say Rs. 5,000 per month per person, I am ok with there being a hoard of rich who are getting richer.
Indians can be blamed for complacence - especially now when they should have demanded much stronger reasons (than inflation control by 1%) for putting unnecessary and counterproductive brakes to the economic growth.
8% is good enough for us. 9% is a bonus. 10% is probably too much. Here is where Chinese differ. I presume their policy makers would be saying, anything below 10% is underperformance. It really boils down to the attitude. If you do not feel like growing at 10%, you probably never will. The issue is that the ultimate price for your suboptimal attitude is paid by the millions of unemployed or underemployed who could not find enough work in your low inflation economy!
We have cheaper food, but no money to buy it - problem solved.
Nobody is quite keen on examining the fundamentals. And of course with selective perceptions there are always events to justify one's stance. My personal observation is that the talk of bubble is stemming from the inability of most Indians to deal with their country's potential. It is the inherent discomfort with non-linear growth however robust it is. One such Indian also happens to be the governor of the reserve bank and has used his power to revise downwards what has been a fairly robust growth story.
There has always been much of comparison between india and china. A key difference often cited is the difference in the governance model. In addition to that, i believe there is a deep rooted difference of attitude. Chinese attained 10% growth sustainably over the decade partly on account of the reforms, partly FDI and partly the sheer confidence to bulldoze growth through resistance to it. Indian policy makers on the other hand get fidgety if growth numbers start to look above their mental blocks. 9% is enough, now let us focus on inflation instead - is the wisdom. Very counterintuitive to me. India has tried the license permit raj for long enough to know that growth is the starting point of any hope for elevating millions of its populace out of poverty. The desperation to control inflation looks more politically driven than by sound and ambitious policy making. India was just poised to break free of the lower orbit growth rate of 6-7% and move to a much useful 10%. But 1% too much inflation was enough to rattle our policymakers into slamming the brakes on a decently accelerating car. Cowardly by a long shot.
The issue is that the growth impact takes much too long to show its benefits while inflation bites much earlier. And makes politicians lose elections as well. I would not be surprised if the real wages have indeed remained constant and have in fact gone up during last three years. If that be the case, who is really worried about inflation - especially if it is tiny 1% more than the "comfort zone" - much arbitrarily defined. Agreed, too much of inflation redistributes wealth - typically against the poor. But reducing growth is making everyone pay as much or more price. It is the age old mantra of keeping everyone poor in a bid to increasing equality. I do not care much about equality. I worry more about the absolute standard of living of the poor. If that is above say Rs. 5,000 per month per person, I am ok with there being a hoard of rich who are getting richer.
Indians can be blamed for complacence - especially now when they should have demanded much stronger reasons (than inflation control by 1%) for putting unnecessary and counterproductive brakes to the economic growth.
8% is good enough for us. 9% is a bonus. 10% is probably too much. Here is where Chinese differ. I presume their policy makers would be saying, anything below 10% is underperformance. It really boils down to the attitude. If you do not feel like growing at 10%, you probably never will. The issue is that the ultimate price for your suboptimal attitude is paid by the millions of unemployed or underemployed who could not find enough work in your low inflation economy!
We have cheaper food, but no money to buy it - problem solved.
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