Risk vs Uncertainty







Jayant Pai | jayant@ppfas.com

Quick question: When was the last time you woke up in the morning and felt completely certain about the way your day would pan out? Sure, you may have aimed at accomplishing a series of tasks and also meticulously planned your path. Despite this, you tacitly knew and acknowledged that there was always the possibility that things may not turn out as planned. This, however, did not paralyse you and make you sit at home.  Continue reading

Peeping over the wall

Jayant Pai | jayant@ppfas.com
The recent rally in the indices has resulted in some predictable reactions:

Disbelief: During the last month of 2011 in the customary media surveys on the investment outlook for 2012, most “market experts” – both domestic and foreign – were unanimous that the unholy trinity of high inflation, global crises and faltering growth would result in the Indian indices slipping further. Paradoxically, the only person who was publicly bullish is one who is usually denounced as a “perma-bear”.

The subsequent rally (currently going strong despite a 15% bump-up from the recent low) is being viewed with disbelief by these very experts. They are now searching for reasons why the rally transpired (ranging from short-covering to the Reserve Bank of India’s intervention in the currency markets). Continue reading

Expense ratio for ETFs is lower than MF

Exchange-traded funds (ETFs) are, in the opinion of many market experts, an idea whose time has come. Global investors are affirming this belief by pouring huge sums into these products. As of December 31, 2010, the global assets of ETFs of all hues amounted to a staggering $1.48 trillion, an impressive jump of 28% year-on-year.

Today, the ETF industry encompasses products across the entire spectrum, be it equities, fixed income, commodities, currencies, etc. They are also the preferred vehicle of many institutional investors as they provide an easy way to take (onshore or offshore) exposure to certain geographies or products, which otherwise may have been inaccessible. Continue reading

Is silver a good investment?

Jayant Pai | jayant@ppfas.com

I met a couple of friends yesterday. One of them – Mr. A, was a stock market aficionado and the other – Ms. B, was a commodities trader. During the course of the conversation A asked B whether this was the right time to invest in gold. B, with a rather bored expression (presumably because this question popped up once too often) answered that while gold was okay at these levels it was silver that one should be looking at from a three month perspective. With my domain knowledge of precious metals as well as my track record of market timing being nothing to write home about I remained silent but from A’s expression I realized that he was sold onto the idea and seriously contemplating an investment in silver. Continue reading

The gold rush

The latest four letter world on everyone’s lips appears to be “Gold”. Here are a few examples:

1. Two leading Indian mutual funds have just launched Gold Exchange Traded Funds (GETFs).

2. Over the past six weeks, two popular business magazines have featured gold as the cover story, both implying that gold prices had reached a permanently higher plateau and that it was still not too late to climb onto the bandwagon.

3. Hardly a day goes by without at least one of the business television channels featuring one gold bug or another. These cheerleaders often state that they would not sell their holdings just now but wait till the price of gold doubles from today’s levels.

4. Companies offering loans against gold are advertising like never before.

However, this spurt in interest amongst the investing community contrasts sharply with realities on the ground. An article in the latest issue of “The Economist” states that Indian consumers are keeping jewellers busy not by buying but SELLING their gold jewellery and this trend has only been increasing with the periodic price rises. In fact, the same article quotes some jewellers who say that the during the recent wedding season consumers are making do with only one set of jewellery instead of the customary three. I also read recently that recent high prices have also cooled off the Chinese consumers’ ardour for gold. Last year, indeed, was the first in which investment demand exceeded jewellery demand. Purchases of gold for jewellery dropped to 2,193 tonnes in 2008 and then to 1,758 tonnes in 2009.

So which camp is correct? I guess I would go with the consumers. Logic dictates that in the case of commodities (and yes, gold is a commodity even though the gold aficionados might consider my statement as heresy) price rises sustain only if end-user demand is robust. In late 2007 the first signs of the onset of the recession in the USA led to consumer demand for oil reducing but speculator demand caused the price to rocket to a peak of around USD 150. After the last of the “shorts” had squared off their positions, the price of oil sank like a stone. This situation was also repeated recently in the copper market where investor demand (fuelled by low interest rates and a belief in the “Restocking” theory) was not adequately followed up by actual consumer demand causing severe unwinding of positions. In gold too, for the past year or so, it is the ETF led demand which is at the forefront, and not consumer or industrial demand. Ease of entry and exit has resulted in investors treating gold just as they would treat any other financial asset. Higher prices are actually bringing in more investors, even as they simultaneously induce end-users to reduce their exposure. It appears that the “Greater Fool” theory is at work right now.

This incongruous situation cannot persist for long, especially in a commodity like gold which does not yield any income to the owner. So far, the most common reasons for the rise in price include (1) gold acting as aquasi-currency in the event of a severe devaluation of any of the key global currencies or (2) it being a good store of value in case of hyperinflation caused by the runaway increase in the indebtedness of the developed world.

However, so far neither of these two bogeys appear to be actually materialising. The longer such “Armageddon” is delayed, the greater is the likelihood of all the marginal investors / speculators losing patience. When that happens gold could fall like a house of cards.

I believe that gold should have a relatively small role to play in one’s portfolio. According it more importance than it deserves could reduce the lustre of one’s overall returns.