Comment

With American and European banks being rescued with huge dollops of taxpayer money, fear is the driving force in the developed West. There is now little doubt that we
are heading for a global slowdown, with America and UK facing a recession in the near term. The knock-on effect of this slowdown will affect the oil economies of West Asia and Russia next, leaving only India and China as the major economies standing.

Should we be happy? India is doing well only because the rest of the world is declining and falling. Thanks to the looming recession, oil prices will come down dramatically, relieving us of some of the price pressures we have seen recently. But that’s about it. The government, on the other hand, is doing everything it can to ruin things. With an election coming up, the central government has messed up its fiscal copybook due to profligate spending: apart from the loan waivers and oil subsidies (someone will have to pay those bills some time), the UPA is also dishing out huge goodies to government staff in the form of the sixth pay commission wage hikes.

As we approach the elections, every state government will be trying to go one up by announcing pay revisions for their own staff, making things worse. As an investor, though, I am thrilled that the UPA government has messed up. Stock prices have crashed, and could crash further. After many, many moons, investors will finally have the option to pick up solid blue chip companies at sensible prices. I hope real estate prices crash too — so that the cartel that holds prices up currently is forced to sell at sensible rates.

My personal take — already stated before — is that most shares are worth a look at Sensex levels below 10,000, but not real estate at current prices. Based on the economic scenario I have painted above, the stock market will probably stay flat for at least a year, if not more. The real estate market should ideally crash in 2009. If you don’t believe me ask yourself why DLF shares have crashed to less then half their peak value when their list prices for housing have not.

I can’t predict whether the market will crash further to 5,000, soar to 18,000 or move sideways in the foreseeable future. But this is what I am doing: having rebalanced my portfolio to reflect my appetite for risk, I am now at the stage where I can invest every additional rupee of saving in stocks. And that is what I propose to do as long as the market stays in the current zone. If it falls or stays below 10,000, I don’t see why anyone else should not do the same, too.

I have realised the hard way — after losing pots of money — that the golden rule of growing wealth is really asset balancing. You cannot stake money you can’t afford to lose in the stock markets. But once you have reached the point where you are willing to lose money, it makes no sense to hang on to fixed deposits or debt funds.

In terms of risk, given the current scenario of failing western banks, my assessment of relatively risk-free avenues is as follows: Lowest risk — deposits with nationalised banks, especially SBI.

At the next level, I would put money in liquid and liquid plus funds.

Then would come deposits with large Indian private banks (HDFC, ICICI, UTI and so on ). After that I would put foreign banks and old generation private sector banks. The riskiest banks are cooperative banks, which currently pay more interest, but the RBI is not so committed to rescuing them as nationalised or private sector banks. Some people may argue that deposits with foreign banks could be less risky than those with private sector banks. I doubt it. The big private sector banks in India are too big to fail, and the RBI would be more than willing to bail them out than foreign banks, who cater basically to high net worth customers.
Email: r_jagannathan@dnaindia.net