Every rise in the equity markets brings hope and every correction soon after, despair. Investors stuck with portfolios that are showing large losses are a confused lot. Should one book the loss and move out Or should the portfolio be allowed to hibernate until the next boom Or is it the best time to buy If no one knew that the fall in the markets would be so deep, and that financial institutions across the world could collapse so badly, then it is also true that no one knows when markets will revive or what can set the financial system right. It will, therefore, be a long process of discovering what has gone wrong and how it can be fixed, before markets stage a comeback. Never underestimate the impact a financial crunch can have, even on otherwise strong and profitable businesses. Many companies have lived through crises and reinvented themselves, but they are not easy to spot in the middle of a storm. Rather than look for advice about what to do next, understand that we know too little to be able to do meaningful analysis of any kind. Humility is a trait that markets enforce on participants from time to time. And thats a valuable lesson.
Keep an eye on the yuan
The biggest surprise in the current crisis is the strength of the US dollar. For all the weakness in the economy, the currency is holding up, more due to the actions of exporting countries to manage their currencies and to stash away reserves in US dollars. The G20 meeting scheduled for November 15th is likely to be crucial for currency markets. While nothing dramatic such as downgrading the dollars status as the international reserve currency is likely, we need to see how exporting countries faced with a US recession plan to deal with their managed currencies. Much has been made about the Chinese rescue package. But the real story is the slowing down of its growth numbers. Chinas woes have their roots in the reduced demand for its exports. Allowing the Yuan to appreciate may not be in its interest. In a country with a high saving rate, consumption growth has been difficult to achieve. The system of government-led investment and its financing means that monetary policy may not have the effectiveness it should have. What China does with its currency could be more important than what happens to the US dollar.
High toll of liquidity crunch
The fall in inflation rates, triggered predominantly by the fall in the price of oil and commodities, has increased the demand for another rate cut. But the credit crunch in the markets does not seem to have let up, even after the injection of substantial liquidity. Last weeks data from RBI showed that banks have increased their G-Sec holdings, instead of lending the funds that were released. Further rate cuts would tempt banks to use their treasuries to make some money in the G-Sec markets. Dont forget that it was the falling interest rate cycle and resulting high treasury profits that resurrected most banks in the early 2000s, when they were all in the restructuring mode. This time, both banks and their borrowers are in trouble, the latter more so. So if banks choose treasury gains over lending, many businesses will choke for want of funds. Unlike last time, there are no long-term lenders this time around. Those financial institutions have become banks.
The crisis of funds is likely to be the highest for those who issued FCCBs (foreign currency convertible bonds), convertible at fancy bull market prices. Now that those conversion prices are no longer feasible, and foreign currency borrowing is unavailable, issuers will find it tough to roll the debt over.
Get asset allocation right
The uncertainty in the markets has revived interest in small saving schemes. This tax saving season most investors are likely to choose PPF (Public Provident Fund) over ELSS (Equity Linked Saving Schemes). Retirement planning is still not very well entrenched in the markets and minds of investors. While there is no denying that lifetime savings should not be exposed to undue risk of capital erosion, it is also true that long-term savings need growth. Only equity can ensure that growth in corpus. What is needed is an asset allocation plan, rather than switching wholesale from PPF to ELSS and back. This plan needs equity at its core, and debt products as the cushioning. It also needs periodic rebalancing to make sure that all the equity investments are not liquidated at a single point in time. A life-cycle strategy that gradually modifies the asset allocation plan starting with higher equity in younger age, lowering it as one nears retirement, and stashing away the corpus periodically in income-yielding instruments, is what is needed. There is no hope yet for a well calibrated and standard retirement planning strategy yet, as the PFRDA (Pension Fund Regulatory and Development Authority) Bill will unfortunately lapse.
Poor customer service
Sriram wrote about his experience of trying to open a three-in-one trading account with a large private sector bank. He expected that the account would be opened very fast, since demand for these products would have fallen off after the market crash. The bank opened the account after two months. And he has received the passwords, and pins to his bank account and his trading account. Only he does not have the trading account log ins or the ATM card, to use that helpful piece of information. He wonders: should they not be sending a letter, indicating that the accounts have been opened and should he expect the PIN and password mailers After advocating safety of PINs and passwords, should the bank not ensure that these mailers are not sent before the account details, to be left lying unattended Decentralisation of account opening services has its perils and does not seem to be translating into better services anyway.