Smart ways to invest and attain early financial freedom

Friends -First the disclosures - I am writing these posts to share my investing ideas and where I am investing my money. I am not recommending that you do what I am doing.

Second disclosure – this is a long post – so be aware before you start reading.

My last post advised you to get out of the stock markets as soon as possible. Till that post, for the past few years, I have been urging everyone get into stock markets through equity MF’s and direct equities. My past week’s actions have come from my belief that at volatile times like these, we need to be actively managing our assets. All I am doing is basically selling assets that are going down (equity) and buying assets that are going up.

In the past few years, stock markets have done well and all of us made money. However, since early 2015, the markets have not performed - Sensex is minus 21% in the past 12 months. After watching and analyzing the markets for one year, I have turned bearish. I believe that the coming year (may be even longer) could be a very rough ride.

Post 2008, the central banks in US, Europe and Japan have pushed long term interest rates to near zero to stave off global depression and ignite economic expansion. They have been successful in the staving off global depression – but economic expansion has not happened. And now China is slowing down and the markets are looking towards another bout of global slow down. Beyond China, there is no new growth engine that can pull the global economy up (India is a growth engine -but is not yet that big a player globally).

I believe that China will need to devalue their currency in the coming months to recapitalise their banks (which seems to be in bad shape -but is not known officially) and push exports. Some large hedge funds are predicting a 30% devaluation of Yuan in the coming 18 months. While my knowledge is limited in this area – I believe that there will be devaluation. In Jan 2016, People’s Bank of China (their RBI equivalent) had to spend 100 Billion USD just to keep the Yuan from devaluing further. This kind of costly intervention is not going to be sustainable, they will need to let their currency devalue.That will mean that Indian Rupee and other currencies will also devalue to stay export competitive.

Now the question is what will happen in the coming months.

  • If one believes that situation will improve globally– then it is time to buy into equities and MF’s.
  • If one believes that situation will not improve or go worse – then we must be ready for a volatile ride and invest in dips and stay invested for a longer time frame – with a hope that things will improve
  • If one believes that situation will further deteriorate – then it is time to exit stocks and MF’s (that invest in stocks) and get into lower risk assets like gold and bonds.

My forecast is that the last scenario will play out in the coming months. Hence I have exited stock markets last week.

In this situation of economic slowdown, market volatility and expected devaluation of INR vis a vis USD, the best place to invest is Gold. As you probably know (my book explains it in detail) – Indian price of Gold is dependent on two factors – the global price of gold and the USD/INR conversion. In the current situation, with investors going towards lower risk avenues, global demand for gold will increase and that will mean the price of gold in USD will go up -resulting in price increase in INR as well. Further, with the devaluation of INR, the price of gold in India will further go up.

The following charts explain what is happening –(these are from xe.com, goldprice.org and moneycontrol.com):

Yuan VS USD in the past year - The Chinese Yuan has devalued once in Aug 2015 which was controlled and then in Nov till Dec (which was not so controlled). As is visible, in Jan 2016, the Yuan was forcibly kept steady by PBOC splurging USD.

Yuan to USD

INR VS USD in the past year - This chart shows that the INR has devalued from around Rs 62 to Rs. 68 to a Dollar in the past one year. Pse note that the periods when Yuan has devalued, INR has been under pressure to devalue.

 INR to USD

     

Global gold prices in past three years -  This chart shows that gold prices in USD has been going down till December 2015 and in Jan 2016 there is a big spike – fears of global downturn has made investors chose gold and other low risk assets vis a vis equity.

gold prices in USD

 

Indian gold prices in past three years - Here the spikes in the gold prices are either due to spikes in USD price or the INR /USD conversion rate spikes. The Jan 2016 spike is clearly visible.

Gold price in INR

 

Indian gold prices in past six months - the spike in prices since Jan that you see here is due to global prices going up and the creeping rupee devaluation vis a vis the US Dollar

 

gold price in last six months

Based on this line of thought, I am moving into Gold from equities and Equity MF’s – this may be a temp move – I will return to equities once the equities start doing well – not sure how much time it will take.

When it comes to Gold investing – I invest through Gold ETF’s. Here are the five biggest Gold ETF’s in India –in India, Gold ETF’s are backed by physical 24 carat gold and each unit of ETF is equivalent to one gram of gold. I will be investing in Gold through these ETF’s in the coming week.

gold etf

 

Author Description

S. G. Raja Sekharan

S. G. Raja Sekharan is a visiting MBA faculty, a mentor to budding entreprenuers, a wealth management consultant, an author of a book on Investing in India and the author of this blog.

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