FIRST PRINCIPLES By Uma Shashikant
NEW DELHI (The Indian Express), October 15, 2007:
Srinivasanji from Chennai wrote in sharing his strategy for the rising equity market. He is 72, and had invested all his money in the post office and in RBI bonds. In the early days of the bull market, he began an equity SIP with a mutual fund, in which he invested the monthly income from his post office scheme.
When his RBI bonds matured, he invested them in a balanced fund. He then took a SWP (systematic withdrawal plan), and transferred the gains every quarter systematically into the Senior Citizens’ Savings Scheme. He has 10 per cent of his savings in an equity fund, which he has simply allowed to grow.
He may not have beaten the market, or earned a fancy return, but he was able to enhance his return from 8 per cent to 20 per cent by simply doing this, and is content to have doubled his corpus using the bull market. It was simple discipline that helped him do that. On the one hand, he was participating in the equity markets, but taking away the gain to increase his corpus periodically. On the other, he was making his income from the post office grow a little more by investing it in equity. An example to emulate, indeed.
Relevance of Sensex
The obsession with Sensex and the counting of the billions of the richest men is completely tiring. Voyeurism of varying degrees seems to have gripped the media, with the maximum attention being paid to what is happening to somebody else, or to weaving stories of fantasy. I dread the Sensex 20,000 level and the hype that will come with it. I can also recollect the complete sniggers when the Sensex crossed 1,000, when people claimed that an index whose starting point was 100 was overvalued at 1,000.
In the early days of its construction, people would ask: of what interest is a market number if it cannot be bought or sold? To the millions who don’t earn enough, and to the few more millions who cannot save, and to some more millions who don’t invest in equity at all, the number means so little. It is, after 20 years of construction, a number that enthuses only the urban well-to-do Indian. The Sensex level must persuade us to ponder this difference and ask how prosperity for a few can become prosperity for many. Closer to yet another election, this question remains unattended and unanswered.
Beyond consumption
This time last year, we are busy debating whether the economy was overheated or not. This time around, we are asking whether we have slowed down or not. The Index of Industrial Production (IIP) numbers released on Friday create some renewed optimism that growth may not have slowed down after all. But banks have already begun reducing interest rates and encouraging borrowers to come in. The credit-deposit ratio, which was galloping at over 100 per cent is now around 70 per cent, and it is time for banks to press the accelerator, at the first given chance. Earning numbers don’t show signs of slowing down yet and this quarter is expected to be as good as the previous 20. Interest rates cannot be increased now, even if there is no sign of a slowdown, because money will come flowing in from global investors.
The problem, perhaps, is that we are asking these questions purely from a financial market perspective, and ignoring the real economy with all its imbalances underneath. Consumption still dominates economic growth, and cheap credit will make it look even better. But it is investment, productivity and employment that must look up. There is no pill in sight for that yet. Since agriculture is not listed, productivity losses, farmer suicides and poor farming practices don’t have the power to drag the Sensex down, and create screaming headlines.
IFCI
The last of the large financial institutions, IFCI, will hopefully soon be taken over, and become a universal bank. Valuations have moved not on the basis of the balance sheet, but on the basis of offices, property, geographical presence and such ‘invisibles.’ Sudden concern about multiple public sector owners has cropped up, and halted the stock’s rise to Rs100 and beyond.
There is no denying that term financial institutions have had their run, and they should now metamorphise into something else. But what happens to long-term corporate borrowing? Despite several committees and reports, the corporate bond market has not taken off. Right now, companies may have a low debt-equity ratio, and are borrowing abroad or using internal accruals. But sooner rather than later, they will need large borrowings to fund their expansion. Infrastructure funding has to be facilitated by a large and liquid long-term corporate debt market. Another of the lesser known — and unimplemented — initiative.
Uma Shashikant is managing director, Centre for Investment Education and Learning
© 2007: Indian Express Newspapers (Mumbai) Ltd.
