We will start with my favourite strategist who makes a case for investing in only top 5 per cent frontier companies across sectors. Everything else with few exceptions will mostly not be good investments. Consolidation of industry is good for industry profitability. After all it is proven that oligopoly is good for profitability but airline industry has proven them wrong. Next is an interesting article about a strategy which not only allows you to prepay your home loan but also create wealth. Lastly not many would have read about Economic confidence model, but then thats why I have written about it because it is rightly timed.
I reiterate that this is only a sampling of some of the best content I read through the week, with a dash of my own thoughts. Until next week…
Invest in only top 5 per cent frontier companies
Victor writes – The middle is eroding as asset-based finance drives inequality. While it is accepted that we are in an era of some of the highest ever inequalities, there is a persistent belief that the right remedy is to generate faster growth rates. While true, it ignores the importance of asset classes in driving both growth and inequalities. In other words, financialised economies require constant flow of new debt to support asset values, which in turn make room for more debt to enable asset prices to rise even further. Over the last three decades, asset prices have morphed into a lubricant, determining consumption and investment choices. Unfortunately, the same processes that drive values and growth are also responsible for inequalities. By stitching together historical data with the Feds recent surveys of consumer finances, authors confirmed what Saez, Piketty etc have already illustrated, i.e. financialisation waves aggravate inequalities.
I would argue that India is also reaching that level of disparity otherwise how do you justify having 40 per cent of your equity benchmarks represented by BFSI sector.
This has serious investment implications. Sadly, the omelette cannot be unscrambled; all solutions are tough. While there is a vibrant debate as to what can be done to relieve what are clearly severe social and political pressures, there is no consensus, other than blaming multinationals and foreigners. As convenient scapegoats, these would continue to be the prime targets. The most rational corporate response is to hide and prepare and try to localise while reducing costs by aggressive use of technology. Societal responses are likely to include income transfer policies and wealth re-distribution strategies. None are likely to be easy and all would be controversial, thus further inflaming passions and solidifying extreme left and right, while the centre disintegrates.
Victor closes out by recommending staying with top 5 per cent frontier firms, basically industry leaders who understand these changes and dynamically adapting their business to these changes.
There would be few Hail Mary passes; we avoid purely cyclical stories, unless heavily discounted. The centre cannot hold. READ MORE
Oligopoly but still no winners
Andy Mukherjee writes – Indias per capita income gap with the US in 2014 was the same as Chinas was in 2002. But, back then aggregate Chinese prices were 24 per cent of US levels, the figure for India is already 29 per cent. Unless New Delhi can create opportunities for faster catch-up in incomes, further economy-wide price increases will only erode competitiveness.
From transport to communication and investment banking, the motto of every Indian business seems to be: “Lets get volumes today, pricing power will come tomorrow.” For tycoon Mukesh Ambani, it means feeding his countrymen 3.4 billion hours of video content every month and hoping that his telecom services less than $2-a-month revenue per user will turn into a bigger number tomorrow. As Andy summarises, our fixed cost structure is just too high to deliver profitability at current levels of income inspite of industry consolidation (oligopolies). READ MORE
The strategy not only helps you to prepay the home loan but also create wealth. Vijay Mantri explains in simple term about how best to combine SIP and home loan payment with an illustration. Lets say you have taken last 20 years average home loan rate which is close to 10.5 per cent. Currently, home loan interest is 8.6-9 per cent. For Rs 60 lakh housing loan, you pay close to Rs 60,000 EMI (equated monthly instalment) per month and over a 20-year period you pay Rs 84 lakh interest. So, you took Rs 60 lakh housing loan but through EMI you are paying Rs 60,000 per month. So, over a 20-year period, you pay Rs 60 lakh plus Rs 84 lakh, which is Rs 1.44 crore you will pay to the housing finance company.
You have Rs 60,000 EMI. So, start Rs 20,000 SIP. For the sake of avoiding any complications, take only Nifty, but you can take any other scheme. So, you have started Rs 20,000 SIP in Nifty. You are paying Rs 60,000 EMI and you have also started Rs 20,000 SIP. Dont touch this for the first three years—continue to pay Rs 60,000 as EMI and Rs 20,000 SIP for the first three years.
After 3 years, you look at how your SIP has done. For the sake of convenience, if the IRR of SIP goes beyond 15 per cent, then it means markets are doing very well. You take all your money out, except the last 12 months. Dont touch the amount for the last 12 months because there could be exit load and tax complications.
So, suppose you are doing review of 48 months, then you take out money from 1-36 months. Take that money out because you have hit the 15 per cent target. It is not necessary that you hit 15 per cent target in 36 months. Sometimes, it takes 48-60 months. Whenever you hit the 15 per cent, the target you have in mind, you take out that money except the last 12 instalments of SIP and to that extent you pre-pay your housing loan. Lot of customers believe that advisors dont tell when to take the money out. So, this is a simple strategy.
It helps you to sell in the rising market. While selling in the rising market, you are also paying your liability. So, you get a lot of mental comfort that I am knocking off my liability.
On an average, you will be able to repay your 20-year housing loan in 10-11 years. The market goes through the bull cycle of every 8-10 years. So, when you hit 15 per cent, the next 15 per cent will come in the fag-end. So, maximum you end up doing this exercise twice, but it will have huge benefits.
The above illustration is too simplistic, but it allows you to get away from noise and strengthen your household balancesheet. More from the article
What is Economic Confidence Model and what does it signify?
The Economic Confidence Model (ECM) is a global business cycle. This is reflecting a shift in global capital flows from Asia and Europe to North America. The Fed has raised rates twice this year and is expected to raise rates a couple more times by year end which may attract more foreign capital into the US dollar with monetary policy remaining loose to very insane in Europe and Japan. We have the ECM, which has destroyed the European bond market, frozen like a deal in headlights. It is trapped, and it realizes that it has been buying the debt of member states who are now addicted to excessively low interest rates. If the ECB actually stops buying, interest rates in Europe will explode exponentially.
In Japan, BOJ has wiped out the bond market. The government actually bragged that they bought 97 per cent of the government debt auction. Hello? Thats a good thing? The Bank of Japan has reduced debt purchases for a third time in June 2018, taking advantage of the recent stability in bond yields and the yen. At least Japan is reducing its purchases whereas the ECB talks a good game but cannot actually do anything.
So what will happen when some of this capital starts moving to the world largest economy? Read more to understand
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