Personal Finance 2.01

Traditionally, Indians invest and buy gold in the form of jewellery which is the most common gift during religious events and festivals.  However, things are changing and Indian buyers are becoming increasingly aware about the benefits of holding gold in other forms.

ETFs – EXCHANGE TRADED FUNDS are one of them. ETFS are financial instruments that trade like shares and are backed by physical holdings of the commodity.  An ETF basically holds assets at approximately the same price as Net Asset Value of its underlying assets  over the course of the trading day.

Currently, gold jewellery accounts for nearly 70 to 80 percent of the total gold demand in the country.  Investors make around 10% investment in gold which is expected to increase to around 20 – 25 percent in the next two years. This would be mainly because investors are facing inflation, volatile equities and low bank deposit rates.  More investment in gold is expected from retail and high net worth individuals.

India’s increase in gold demand would increase and help imports to rise to 600-625 tonne this year from 480 tonne in 2009, the rise in investment demand would be comparatively faster. There is an increased awareness now. People have started realizing the fact that coins and bars would protect the value of their investment unlike jewellery.  

In the April to June quarter, the country’s investment demand for gold was at 41.5 tonne, up 7% on year, while jewellery demand stood at 123 tonne, down 2% on year (data from the World Gold Council.)

Other factors involved here are the cost of jewellery, which is much higher, by 5% to 6% (on top of the price of gold), while in case of bars and coins it’s merely 0.01%. Mainly the reason for the investment segment of India’s gold market has been expanding rapidly.

In recent years, Indians have increasingly bought gold bars and coins across bank counters and at jewellery shops, purely as an investment. Also it’s a convenient investment as bars and coins can easily be exchanged for jewellery at the time of weddings in the investors’ families considering the Indian culture and nature of investors.

China has always been a strong competitor to India in terms of Economic Growth. However, India is expected to emerge out as the fastest growing economy by 2013 -2014. Globalization, being one the most important factor contributing to this.  Traditionally Indian society has been conservative about the earning member in the family. Leaving a, comfortable more than half of the total population on India, which is as of today nearly 1.18 billion; unemployed. India’s current unemployment rate is somewhere close to 7.8%.  

The demographics of India are remarkably diverse and we are the second most populated country in the world.  Nearly 50% of India’s population is below 25 yrs of age and over 65% below the age of 35yrs of age.  The median age is basically that age which divides the total population into two numerically equal groups; half of the population younger than this median age and the other half over this median age. India’s median age is around 25.9 years. This is one of the lowest median age as compared to other major economies. For example Australia has a median age of 37 yrs and China: 35.2 yrs.

In general when an economy prospers, the death rate and the birth rate both decline. Former followed by later. So logically, this will lead to more no of working age population as to the non-working age i.e. no of old and children decrease considerably.  This automatically reduces the dependant population. The ratio of nonworking to working age population decreases.  The twin effects of this; increase in the number of working people who contribute to growth.  As the number of dependants reduces, individual savings increase. Overall effect is the increase in the country’s rate of savings.

Structural reforms play an important role as the increase in work force increases. Finding work for those who offer to work is an essential element due to which even with a stagnant per capita output, the sheer increase in the number of workers would increase the GDP.  (GDP is gross domestic product: measure of country’s overall official output).  Imagine the impact on GDP if the productivity improves. This is what reform is aiming at it is pushing up productivity per worker.

India’s GDP has averaged around 6.07% while china’s GDP has averaged out to around 10 %. The major factor being exports. China has been capturing the world market. However, China’s exports growth would continue to slow in line with an expected slowdown in economic growth in the United States and European Union, they being the major markets for China’s exports. China is expected to come down with a growth rate of 9% in 2012 and around 8% in 2015.  As against this, India’s Growth rate will jump to a 9% and remain persistent to 9%-9.5% in 2013-2015.

The main reasons for this will be increase in consumption; quality and quantity. Increase in savings and investments. Increase in government expenditures which mainly include infrastructure and, machinery and equipment and the net exports (exports – imports).

Mathemtically this is simply C+I+G+X = GDP.

C—consumption

I— Investment

G—government spending

X—net exports.

In the near future India is expected to see a persistent increase in all these factors due to which GDP will increase persistently as against China’s.

This is an article aimed towards readers who have not got any past exposure to finance and stocks. It is best to start with knowing the basics right…

If you simply Google the definition of stock you would probably find a long statement; “the capital raised by a corporation through the issue of shares entitling holders to an ownership interest (equity); “he owns a controlling share of the company’s stock”… confusing isn’t it?

              Stock is basically a piece of ownership in a company. A stock and a share are completely interchangeable terms. So, next time you come across the word ‘share’ think ‘stock’ which is nothing but a part of ownership in an organization.

               I’m sure the next obvious question coming to your mind would be how can I invest in stocks? Can I buy stock of any company?

               The answer to this needs to be explained in a little more detail. There are private companies and public companies. Private companies cannot be invested in. As the name suggests they are owned privately. Private companies may issue stock and have shareholders. However, their shares do not trade on public exchanges and are not issued through an initial public offering***. In general, the shares of these businesses are less liquid and the values are difficult to determine.  

(***Initial public offerings: is a process through which a company can go public and issue shares. It’s basically the first sale of stock by a private company to the general public. It is also referred to as public offering.)

                On the other hand a publicly held company is that which has already issued shares via IPO ( Initial Public Offering ) and is either traded on any of the stock exchanges ( also termed as open market ) or in over the counter market*.  National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are examples of two such exchanges.

(*over the counter market : The phrase “over-the-counter” can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to financial instruments such as derivatives and other securities which are traded through a dealer network. )

Why would a company issue stocks?

                 A company would issue stocks for a number of reasons. One of the main reasons being raising capital which may be required for either expansion or starting off a new project all together. So when investing, it is advisable to know the company’s motive to issue stocks, its historical performance, management rules and future short term and long term goals. This helps in providing a guide line while making investment decisions.

                  When a company issues stock it is said to be floated initially which simply means the company decides the price range on which to come out with the initial offering. However it is the demand and supply later that decides the price value of the stocks.  The very act of becoming a public company allows the market to decide the value of the company through daily trading.

                    Once a company goes public, it has to answer to its shareholders. For example, certain corporate structure changes and amendments must be brought up for shareholder vote. Public companies must meet stringent reporting requirements set out by SEBI (Securities and Exchange Board of India).

How can one make money from stock?

                      It’s not as simple as it seems. Buy a stock, hold it till its price goes up and sell it, when it does. What is missing here is the timing. To know when exactly to buy a stock, how long to hold it for and when exactly is the right time to sell. You have to remember that the market is not always predictable and the stocks when fall down can cause tremendous losses. It is advisable to attain some financial knowledge and even assistance before you start investing the first time.

Many Indian companies have almost reached their pre-slump level in sales. Having scaled back expansion plans, they will soon churn out their full capacity. This will definitely leave no room for growth in terms of volume.

The following analysis of the companies excludes smaller companies, which typically fall hard during downsizing.

In the coming year, it is predicted that none of the investments in the stock market may yield above average returned in the next one year.It is observed that high net-worth individuals divert their investments at such times from stocks to structured debt products. Thus, safeguarding their capital invested.

Economist Paul Krugman has predicted the makings of the third depression. The fog of global uncertainty is not quite lifted. The immediate focus is hence to preserve capital while aiming for decent earnings. The long term returns from equities in India is 15 percent. The point considered mainly while analyzing stocks is that the investors should not overpay for growth. Also the stocks here include those having large domestic play and those that have shown dramatic consumption trends like real estate, auto, banks and financial service.

Let’s consider the auto sector first;

Maruti has been by far India’s largest car maker. The demand for small cars has continued to surge forcing Maruti to set up another plant. The stock is trading at a price to earnings ratio (P/E) of 16. The stock has lot of steam

Exide is indirectly dependent on the growing automobile industry. This battery making company captures around two thirds of the batteries that go into cars and trucks. The management also believes that electric vehicles and hybrid vehicles could be its next big opportunity. Escorts is another stock that will seem fully valued.

Banking sector is a sector that has a lot of companies that can be considered to provide value to investors. Major picks include ICICI bank which is a good buy at 1.85 times its book value. The company stock has definitely signaled a clear return to profitable growth. Yes bank plans to foray into the high-return micro finance business. For the long term investor, this is one bank to catch at an early stage.        

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The content on this blog should NOT be construed as investment advice.  All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments

Reliance Industries’ bet with American shale gas has opened our eyes to a potential that exists in our backyard.

 RIL ( Reliance Industries Limited )  today is sitting on almost $6 million cash and is considered as India’s largest company by value. It has however been prowling around the world  for lucrative opportunities. RIL has already paid for a minor stake of 45% in Atlas Energy’s Marcellus lease and in Pioneer Natural Resources’ core Eagle Ford acerage.

 RIL has been makin investments in thse companies without any majority control  and  also it has little presence and virtually no influence over the market. RIL has little knowledge about the terrain’s geology. And therein lies the key.

 The shale story involves bombarding the sandstone rocks with millions of litres of chemically treated water to force the gas to flow. Shale gas is no different from from the regular natural gas ( methane primarily). It was however never pursued inspite of its presence over a wide area since several years due to the difficulties in extraction process.

There has been a stunning technological progress and medium sized oil companies figured a smarter way of drilling in the last 3 yrs. In the Marcellus basin in Pennsylvania for instance, reserves have grown from 15 trillion cubic ft from 5 yrs ago to 270 trillion cubic ft.

For Reliance , the partners exclusive knowledge in cracking the shale plays is what brings value. With RIL going through yet another deal with  Carrizo over the Marcellus basin , oil analysts in India are starting to  have a different opinion all together. They believe that for the Indian company the prize ultimately lies not in the Rocky mountains but back home.

Precious little has been done in India on shale gas prospecting so far, even though the rock formation is common in several parts of the country like Damodar basin, Jharkhand and West Bengal apart from parts of Andhra Pradesh and Gujarat. ONGC being probably the only company actively searching for shale gas reserves in India. The Indian government has no policy on shale and has not permitted exploitation of the gas. However, increased awarness of the global success and RIL’s high-profile investments can be expected to shake things up. The Indian market is energy starved and will grow much faster than the US in the future.

RIL clearly hopes to cut its teeth in the US market which is at the cutting edge of shale gas extraction. The aim is surely to be a big player in this area in India too. The experience will prove to be in value when India is ready to auction its own shale acerage. RIL for now is entering one of the fastest growing opportunities emerging in the US unconventional gas business.

RIL’s deals will materially increase it’s resources base and provide an entirely new platform. A platform from which it can grow into explortion and production business while simultaneously enhancing its ability to operate unconventional projects in the future. However, the big leap for RIL and India can come only when gas productions start here . As for long term investors RIL would certainly prove to be more than just beneficial.

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Statistical source: Forbes.