Gold prices have fallen. Bond prices have tanked. And now equities are sliding downwards with no end in sight. All those who wanted returns from market-linked products are running scared
The prevailing mood among Indian savers who want to take a bit of a higher risk for higher returns is bleak. All major asset classes are taking a beating and falling over like 
dominoes over the last few months. First, it was gold, which crashed in April. Then, bond prices got squeezed in June and July. And now, it is the turn of equities to cause heartburn to Indian savers. In the midst of all this, the rupee has pummeled, causing worries to importers, investors and policy makers alike. All those who looked to invest risky assets for higher return have been suffering one setback after another. The mood is truly despondent.
First, it was gold prices, which crashed in April. The average monthly price of gold was Rs30,520/10 gms in January which crashed to Rs26,768/10 gms by the end of May. During this period, panic ensued and a lot of investors started to take money out of gold and put it into bonds, which seemed the asset to buy because “everybody” expected the Reserve Bank of India (RBI) to reduce interest rates. Meanwhile, the equity markets rose as RBI cut interest rates twice, once in March and once in May, from 7.75% to 7.25%.
In the beginning of the year, the sentiment was bullish after RBI cut interest rates, in January, to boost spending. This happened after the central bank was “satisfied” that inflation levels had moderated and time was ripe for growth. The Sensex reacted briefly, and moved up from 19,714 and punctured 20,000. At the same time, prior to the budget in February, the finance minister P Chidambaram, went shopping abroad to placate foreign institutional investors (FIIs), who were worried that no reform measures were undertaken. The markets started tanking in anticipation of a populist budget (rather than one with “reforms”). The budget turned out to be a total dampener. FIIs started withdrawing money in droves (Having believed in the FM’s promises, foreign brokers suffer a rude awakening) and this took the market to new yearly low, when Sensex touched 18,144 in mid-April.
Then, in late May, the US Federal Reserve announced that it would “taper” bond purchases (i.e. wind down its quantitative easing program). (Check out our article 'Quantitative easing myths debunked'). This sent not just the equity markets into a tailspin, but also emerging market currencies, particularly Brazil’s Real and Indian rupee. Riots ensued in Brazil while Indian policy makers were in a tizzy. The rupee depreciated from Rs54 levels and breached Rs60 levels. This caused RBI to panic and introduce a host of measures to stem the rupee decline, particularly tightening liquidity on banks, and kept interest rates the same. Investors, who had moved into bonds, suffered a massive blow. Bond prices fell. Food inflation returned to haunt the RBI.
Meanwhile, thanks to the rupee, price of gold, in rupee terms, became dearer. Concerns about fiscal deficit and current account deficit resurfaced. And rating agencies were concerned about India’s fiscal position. This caused short term bond yields to shoot up. Investors were worried about the government’s ability to service its debt, especially after the Cabinet approval of the controversial Food Security Bill which will dent long term fiscal deficit.
Equities are back to the levels seen after P Chidamambaram became the finance minister again last year.
The above graph shows the volatility in equity market this year. Gold, bonds, equities… all have disappointed investors so far this year. Many investors are uncertain about the direction of any of the markets. The fear is well and alive on risk street.
Check out our cover story: Turbulence ahead for equity, bonds and gold!
Inside story of the National Stock Exchange’s amazing success, leading to hubris, regulatory capture and algo scam
Fiercely independent and pro-consumer information on personal finance.
1-year online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
Complete access to Moneylife archives since inception ( till the date of your subscription )
Would you ever put 45% of your funds in a single stock, however good that stock may be ???? - not even by a long shot from whatever you have been writing over last many years.
Lets consider an example - In India we have two FMCG funds from ICICI and SBI. If you look at their portfolio you will find that both of them have about 45% investment in ITC..... isn't it totally against whatever you have learnt and have been telling readers for years? Doesn't it throw all the principles of Portfolio Management for a toss ? Then why do these funds have 45% exposure to ITC.
As Jeremy Grantham said "the primary directive, first and last, is to keep your job. To do this, he explained, you must never, ever be wrong on your own."
So how do fund managers do it -the fund manager very conveniently has a benchmark against whom he can compare himself. To retain his job he must not underperform the benchmark even in the worst case scenario by a huge margin. In the best case scenario he hopes to outperform the benchmark little bit by slight tinkering in the portfolio to earn his bonus.
So if SBI's FMCG fund’s benchmark BSE FMCG index has appx 50% weightage in ITC, SBI FMCG fund has about 45% of its investment in ITC, even though its totally against what every fund manager/analyst/investment guru learnt and preached throughout his life.
The idea at the back of any fund managers mind is NEVER about giving good absolute returns to their investors - as a retail investor naively assumes, reading all the good articles about -long term benefits of investing and investing thru mutual funds - where one of the biggest benefit is always proclaimed to be DIVERSIFICATION (as a retial investor can not diversify in to many stocks with limited funds). The primary goal of the fund manager is saving his job and for that he has to clone the index.
Simillar thing is carried out in a Diversified Mutual Fund, like a Large cap or Flexi cap fund, but on a more sophisticated level which a retail investor can't figure out (based on the Beta of the the benchmark index etc etc, more on that some other time).
Do you think fund managers are doing a great job, if over five years they beat a benchmark, in which Stock are included at four digit prices and excluded at two digit prices, by a couple of percentage points???
The dark reality is that Financial websites and Journals avoid writing about it because they are part of the system, they are dependent on Mutual Funds for Ad Revenue hence they will write about everything from SEBI's inefficiency to misselling by distributors to financial illiteracy of investors but not about the rot in the fund management.
the word "NOT" is missing in the sentence:
"NOT a governmentment
with a number of parties
forming a coalitiion"
All because the major party will be at the mercy of the smaller ones in the coalition
and will be forced to dance once in a while...
Even then, the situation will become stabilized when there is a majority rule and a government with a number of parties forming a coalition.
The Rupee can be stable only when we learn to control imports of cheap electronic goods from China; stop reckless imports of gold and push up our
exportss.
export or perish - which is what Jawaharal Nehru called for years ago - this is imperative now.
And those who target market linked returns must learn to withstand volatility. For this too shall pass.
Is their any blog of yours?
2. Retail investor has been smart by staying away from Equity and Bonds and invested in FDs
3. Mainstream media has a big role in bending the reality. The myth that one should buy on dips is propagated incessantly. When bond yield started going up on May 22 (gradually) and FIIs started pulling out, no one cautioned the retail investor to bail out. Even now media is asking everyone to stay invested in Debt funds when MTM losses have already touched 4-6% of capital value.
Retail investors always worried about Return OF Capital and and not Return ON Capital and this is the right focus
I just want to submit that Nifty/Sensex are misleading. Market has gone down heavily but is not reflected. The simple reason for this is top 10 heavy weights are not allowing Index/Nifty to fall.e.g.CNX PSU Bank's index is down more than 59% in one year from top but Nifty is 6%
higher in one year.