Asset Classes – Why equities are the only real Hope.

“It does Not matter how much money you make but how much money you keep: How hard it works for you and how many generations you keep it for”

India is changing. In good and bad ways. The pandemic ripped apart the illusion of a “safety net” that most people have in their “9 – 5 “ job or business. Millions were caught on the wrong side of the crisis, dependent on a monthly salary and lack of emergency funds. India also being underinsured also did not help as health issues meant breaking into the last piece of savings left. A dichotomy of sorts was being seen in the capital markets around this time. It has been heartwarming to see that TEN MILLION new retail investment accounts have been opened in the last year alone. The pandemic did something that wasn’t happening for a long time – Increase retail participation in the stock market and lead to “Financialization of savings”.

The Key to building sustainable wealth they say is not based on how much you earn but how well you save – If that is entirely true, then why India which boasts of a savings rate of  ~ 20% of GDP, which is much higher than our peers, is effectively still poor when it comes to individual wealth – 80% of our population has wealth below 10,000 US Dollars. A lot of these answers lie not in how much are we saving as individuals but HOW are we saving and where are we channelizing those savings.

Current Indian Savings landscape

Currently in an average Indian Household, 75% of savings are concentrated in one asset class alone – Real estate. 95% of savings are concentrated in Real estate, Gold and Durable Goods. The Rest ( 5%) in financial Assets. A sharp contrast to developed markets where Financial Markets have a much larger pie in household savings.

Source – NCAER report, Oxford.

The picture clearly shows the concentration of wealth in Real estate and durable goods in India. In the West, per se there has been an increased exposure at an individual level to financial assets. This has been one of the significant reasons for the differential in individual wealth in emerging and developed economies. Of course, though the argument regarding the ability to invest remains. We are comparing economies with a sharp contrast in GDP per capita of 2000USD ( India) and 50,000 USD ( USA).

There has always been a hope that emerging economies like India slowly veer towards diverting their savings towards the capital markets. The only good thing about this pandemic is that Covid has accelerated this process. The “hope” that Individuals will gradually move out of physical asserts to equities has now become more of a compulsion. Mainly due to few reasons ;

Your Fixed Deposits are earning nothing

Covid effectively bought the economy to a standstill. Central banks had to resort to lowering of Interest rates and various other stimulus measures to keep the economy afloat. What has happened due to lower interest rates which are expected to remain on the lower side for a long time is that – post inflation, your return on your Fixed deposits or savings account are actually in the negative.

Which in simple term means –

• You Invest Rs 100 today ;
• Interest rates – 5.5% on FD and 3% on a savings account.
• Inflation – 6% +

After a year while you do get back Rs 105.5, your cost of living has effectively increased to ( 100 + Inflation (6%) = 106, making the real yield on your FD effectively zero. And these inflation numbers don’t even account for “lifestyle inflation” where your spending naturally increases as millennials desire a luxurious lifestyle.

GOLD – An illusion of good returns.

Indian Housewives own ~ 11% of the entire current Global Gold output. Our love for the yellow metal is as old as the hills. Fund managers and Veteran investors have a divided opinion regarding Gold in one’s portfolio. Some swear by it as it’s an inflation hedge and some like Buffet have a strong public opinion against it as it yields nothing.

However, the funny part is that for most of the past 2 decades till very recently, Indian housewives have managed to beat Buffet and other market experts. Here is a Graph of Gold vs Nifty returns.

This graph is how Gold has performed in the last 12 years. Gold CAGR returns vs Nifty CAGR is ( 10.84% vs 12.8%) – pretty impressive for an asset which yields nothing right? This is where the illusion of return kicks in. Gold , in reality has yielded good returns only because the Rupee has depreciated significantly in the last 10 years.

Two Graphs here – Gold in USD and Gold performance in INR

You see the difference in returns? – That’s not because there is a difference in the quality of Gold or demand-supply dynamics. There is only ONE reason – massive depreciation of the rupee. If 1 kg of Gold ( hypothetically) was worth 40,000 when INR was 40, that Gold will now be valued at Rs 80,000 just because the rupee has depreciated to Rs 80 vs the USD. This has exactly what has played out in the last decade. This leads to what I call the “ illusion of safety”. There is no point clinging on to an asset that is doing well due to a variable( currency) that is not at all in your control. Unless one has an educated view that the rupee will keep depreciating as it has in the last 10 years, Gold can be a real underperformer in the times to come.

Gold can be a part of ones portfolio but currently eats too much of an Average Indian household wealth.

Why Equities are the only Hope

Investing – Through mutual funds or Individual stocks is the only chance to build a reasonable retirement corpus. For an average middle-class Indian – A lot of wealth has always been and will always be allocated to build your home, especially in a Tier 1 city. It is what you do with the rest of your savings and how you allocate towards Investing/ Trading that will set you up with a decent corpus for a balanced retired life. An average investor ( including most fund houses) doesn’t beat the Index. The index returns, in the long term, are correlated with the growth in nominal GDP of the Country. So let’s say if India grows at 12% nominal GDP for the next 2 decades – the Nifty will most likely give similar or slightly more returns.

Here is what you need to do to build a 5 cr corpus if youre ~ 30.

History shows us, that the only asset class that actually beats inflation and delivers double digit returns is – equities.

Trading

Probably the toughest nut to crack. I’m not in the camp of – “never trade, don’t take leverage”. The reality is India’s best investors started off as traders. What’s important is – if you do Trade and want to be in the coveted club of the “1% traders who win” – one must dedicate themselves to a steep learning curve and adopt systematic trading and not discretionary. Presenting here to you a very simple yet systematic and noise-free way of Trading that actually works.

The Simplest and Indicator Free Way to play Big Trends if you’re a retail Investor. I’ve Always had a Love-Hate Relationship with Technical Analysis. 100 + Indicators, Too many Charts, and too many telegram Groups. It definitely works if you have the temperament suited for it. Otherwise, you’ll end up spending way too many hours looking at the screen.

For me, the best kind of Trading is data-driven, systematic and something that has a deep rooted Logic and most importantly –  something that can be quantified. More on that later. Stumbled across an Old TA Backtest, so here it is; A very very simple momentum system ( without the indicator fuzz)

• Works on all stocks ( Delivery only, Large Cap preferable)
• Potential weekly rebalancing ( So Discount Brokers only)

Open any Chart and switch to the Heikin Ashi Candle( not your normal candlestick) on a weekly time frame. Look for an entry/ Exit on Fridays only after 3 pm as the candle ( Red/ Green) gets a final confirmation post 3 pm. Sharing the system with an example – This is How I Rode the Trend in RIL from ~ 950 to current 2300 levels.

System steps ;

• Enter the stock on Friday evening only after the confirmation of a green candle. Preferably a green candle immediately after a Red candle.
• Keep holding the stock till the Trend persists. How do you identify the trend? Keep holding the stock till every consecutive Heikin ashi Candle is green on the weekly Time Frame.
• Exit only and when if Candle is Red on Friday. Re – enter on next Green candle.

March’ 20 was a Investors paradise. Fortunately, had a ~ 25 % allocation to cash and Gold. This is how I entered Reliance at ~ 950 levels.

Trades Taken ;

• Entered RIL when first Green candle was formed post the Big Crash. Decided to follow price instead of fundamentals as everything was uncertain.
• Once you enter on Friday when the Green candle forms – do not exit till the red candle. Which first came at ~ 1400 levels.
• Always re enter at first green candle after the red candle. The next stop directly takes you to ~ 2100 levels.

Heikin – ashi is an excellent tool to ride trends and cuts all the noise. One might have to go in and out of stocks frequently when markets are sideways but one makes really good money when the stock starts trending.