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Pseudo-equity investors & asset allocation

india Updated: Aug 08, 2007 03:17 IST
Pseudo-equity

Earlier in March this year, when the global as well as Indian equity markets were temporarily jolted by a “Made in China” upheaval, the 'usual suspects’ were out discussing whether, this was indeed the end of the bull market. Mind you, most of these were the same chaps who sounded extremely bullish less than a fortnight before the turbulence.

I remember, concluding my column in mid-March this year asking, “Are we really serious equity investors with the appetite for risks or simply pseudo-equity investors who cheer on senselessly as the indices ascend, and tuck their tails between their legs and run at the first instance of some turbulence?”

Returning to the extremely volatile Indian equity markets, the moot question remains – do you have the appetite for the risk and volatility that is inherent in equities ? Most, like other retail investors and even fund managers, believe they have it in them, but when the cookie crumbles like it did last May, and briefly turned turbulent in March this year and again now, on account of external global factors, they find the heat too much to bear and suddenly discover the merits of alternative asset classes.

And what are the alternative asset classes on offer in the Indian market? After a brief resurgence, the fixed deposit rate has already begun to cool off. Considering as this still remains the most popular investment avenue of most Indian investors, it will nevertheless, stay in the reckoning unless the deposit rates spiral vertically downward.

The other asset class on offer is real estate. With real estate prices across the country having literally doubled, trebled and even quadrupled in most cases, the general feeling is that this could be the asset class that could bring not only itself, but the entire card pack down. Furthermore, with realty funds not accessible for retail investors, small-ticket entrants stand automatically excluded from this asset class.

Interestingly, the excesses of the property market appear well reflected in the equity market, where the 'land bank' bogey has been bandied to demand and even actually command prices, which defy not just valuation parameters, but also gravity. Buoyed by the irrational investor response to previous overpriced priced realty IPOs, the management of Puravankara Projects and its book-runners too forayed into the primary market. Sadly for them, turbulence had set in, and they were forced to re-price their IPO downward, like Deccan Aviation too had to in 2006 when the markets tumbled.

Gold as an asset class remains evergreen and the ultimate hedge, but given that immense patience is required to hold and grow one's gold portfolio, Indian investors do not seem too enamoured. Mind you, this could also be because, historically, Indians have been great accumulators of gold in the jewellery form. With gold ETF’s now a reality, this could change soon though.

Needless to say, asset allocation is a complex activity and there can be no standard fix that fits all requirements. One big advantage though that the finance minister has accorded equity is to make it the most tax efficient asset class in India, and that for a nation of people who are over-taxed from birth to death, quite often proves to be the cutting edge.

(Ashok Kumar heads Lotus Knowwealth and can becontacted at ceolotus@hotmail.com )