India - Value Trap or Bargain Hunting

It has been a volatile few months for the global markets, triggered by the Fed's decision to defer the much anticipated rate hike . In hindsight, the post market reaction would have made them feel like they missed a great opportunity. The cycle has started again and it is likely they wouldn't miss it in December. Since Sep, most markets have recovered to an extent and as I write this, Dow and Nasdaq are just 2.5% away from their record highs. India, in the meantime, has been volatile and the rate cut didn't really convince the market. I always believe in keeping it simple and am getting excited to start looking into Indian stocks for the first time since Feb 2013.

Background:

• Clients portfolio didn't have Indian exposure since the election as I preferred the safer approach of diversified Asia portfolio since I didn't want to run the risk of NDA failure.
• Valuations were never comfortable to enter India, post the election due to the Modi premium and the investment continued through Asia funds as most funds were overweight India.
• My view at the beginning of this year was that we needed a transformational budget to take Nifty beyond 9000. It looked unlikely then and so it turned out in the eventual budget. Mm
• I felt the upside for the rest of the year is capped considering the steep valuations post the budget. The view was to exit equity funds in India and move to tax-free FDs at 9% than a potential risk of 20%, We might miss out on the 5% upside gains if the correction wasn't coming but it's better than risking the 20% loss.
• India has been included as part of the Mutual Fund portfolio since last month because of attractive valuations.

Why Now ?

• The single fundamental metric of Buffett's I firmly believe is "Be fearful when others are greedy" and the fear is probably the highest now in the last couple of years.
• Margin of Safety - I touched on this briefly here as to why it's an important criteria during the last couple of years. Now, we are at a stage where, for instance, a stock like ICICI is available at PEG ratio of 1. I don't remember when was the last time it was valued so low. We have so many mid and large caps corrected at least 30%
• There are different views on reforms, but the consensus is that it may be too little. I would take any progress irrespective of the rate than none and also the markets have corrected from 9100 levels to 7800 levels since March.
• RBI has done its part by cutting 50 basis points in Oct and even the earlier rate cuts weren't passed on to the economy yet. RBI Governor said this after the rate cut "While the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed". I believe it's just a question of time before the banks pass on most of the 125 basis points
• Considering the above, I feel the risk reward is in our favour at current levels. I always get excited if the stocks/index levels are extremely compelling at 5% lower than current levels and I think we are in that Zone now.

Some of the stocks added during the recent correction

• Indus Ind Bank
• HDFC
• HDFC Bank
• Exide Industries
• TCS
• ICICI Bank
• Havells
• Lupin
• Wockhardt
• AIA Engineering
• SBI
• Canara Bank

Some of the above were added because of the valuations and some are convictions based on the possible turn around.

One of my respected client said India is that "Value Trap", always seem attractive. I hope, by budget 2016, we feel it was more the phase of Bargain Hunting than value trap.

As a value investor, I must reiterate that these are attractive levels to enter. Having said that, December FOMC is a big risk for Emerging markets and a rate hike (likely) can see some immediate panic moves in Indian markets. The more prudent strategy would be to phase out entry over the next two months. It may not be a bad idea to wait out the FOMC completely before entering either. But the larger point is: from a valuation perspective, these stocks are attractive at the moment for a medium to long term investment. In case of further correction, post December FOMC, keep adequate buffer and be ready to add substantially more to the portfolio. 

These views are entirely personal and please do your own research before investing.

Good luck and happy investing.

How good is your financial plan - Wealth Management (Part-II)

"Building wealth is a marathon, not a sprint. Discipline is the key ingredient"

This is the 2nd part of the two part blog. In the first part, I covered the aspects of the risk management. We will look into the wealth management aspects in this post. 

We all aspire to retire early, but the reality is most surveys indicate that the majority fall well short of the requirement. We can get away without any risk management plans in place, if we are lucky, but no getting away from the future expenses like Kids education or Retirement. We all have plans in place , but more often than not, it will be one of those plans which would have lost relevance due to inflation within 10 years, leave alone servicing the retirement period of 25-30 years. We lack the same discipline when it comes to a retirement plan compared to paying off EMI for a property.

It's never too early to start planning, be it for Kid's education, Retirement or Enhancing your legacy. Let's look into the aspects that require some discipline so that our retirement life would be peaceful. It's always easier to stretch myself to earn more now or maximize my investment returns with smarter investments at 40 than having to stretch myself beyond 60, just because we haven't saved enough. 

Retirement Planning :

Simple arithmetic says :

Eg - Singapore

Monthly Requirement : $5,000  (@Retirement age)

Duration                      :  25 years 

Expected inflation       : 3% 

investment return        : 5%, 

Corpus Rquired           : $1.17M

India :

Monthly Requirement : Rs 200,000 (@Retirement age) 

Duration                      :  25 years 

Expected inflation       : 7% 

investment return        : 10%, 

Corpus Rquired           : $4.2 Crores

There are huge advantages of starting early and making the money work smarter. Person who starts at 30 years, requires to set $996 and $2,778 per month respectively if your investment returns are 6% and 0%, The same goes up by 80% if you start at 40. Which is easier? Save $1,000, spend time and look to earn investment returns of 6% or increase the savings to $2.800 per month? For more details on the actual amount for different ages and returns, do look here

I believe in focusing on two options for retirement planning. One is steady passive income, like rentals, dividends, annuities which are adjusted to inflation and the second part is corpus. Sometimes, we might have passive income which will be more than adequate, but it may not help in case of any unforeseen major expenses post retirement. It's difficult to have such lump sum corpus, but ideally at least work towards 50-50. So plan for $500K at least in lump sum if your requirement is $1M and the passive income could provide $2,500 per month.

SRS is definitely a compelling option for those who are working in Singapore. For more details do check here

So what are you waiting for? Do the calculation on your needs and act on it immediately. Longer the wait, higher the amount you need to set aside.

Kid's education :

I don't think the concept of saving for kid's education even existed during my studying days. We all used to take a loan for overseas education or even for NIIT fees 20 years ago :), spend the first decade of your career trying to clear off the loans and then think about savings only in late 30s. Times have changed and also the expectations of the kids. Earlier you start planning for the same, lower the amount you need to set aside per month.

Approximate current cost of tertiary education,

$50,000 (Singapore)

$200-300K (For US/UK)

India isn't getting any cheaper compared to 10 years ago.

Potential Inflation : 6%

Start early so the power of compounding could work in your favour.

Emergency Savings :

This is often overlooked because we don't expect things to go wrong. We are living in an era, where in most places, 10 years of service in an organization creates huge insecurity than loyalty. It's extremely important to set aside at least 18 months of your monthly expenses in liquid assets, as that would give you the much required breathing space, in case you prefer to take a sabbatical or a sudden job loss. It not only provides peace of mind but could be a good beginning for retirement corpus, if all goes fine.

Simple rules for enhancing your investment returns

• As a starter, please use the maximum investment possible with tax rebates, as there is no instrument which provides better and guaranteed returns than tax savings, globally. 
• Do not get into investment which you aren't much aware of.
• Diversify your portfolio as much as possible, across asset class and currencies, so no single failure sets you back by few years.
• It's extremely important to sit with your financial consultant and quantify your various financial needs. Just knowing the numbers would help us understand the gaps and keep reminding us that we need to do something about it. 

Should you have any queries, please feel free to reach me.

Cheers

+65 8113 3272

How good is your financial plan? - Risk Management (Part-I)

"Be decisive. A wrong decision is generally less disastrous than indecision."   ~Bernhard Langer

During my 6 years of venturing into financial consultancy, the most common aspects i observed is procrastination on financial decisions or not having an adequate plan in place. The reasons coud be

• Waiting for something
• Certainty : I'm not sure how long i'm going to be here (most common among NRIs, especially)
• Fear of making a wrong move.
• Nothing will ever happen to me.
• I can always start this anytime.

Often, I observed there are real costs to procrastination, be it with Insurance, Investment Decisions or Estate Planning. A stress-free decision taken during normal times could provide huge relief and peace of mind during stressful moments in the future. There are huge advantages of starting both risk and wealth management early, as you not only pay a cheaper price but also guaranteed protection. 

Advantages of starting early and the power of disciplined savings -  

http://eshers-fa.blogspot.sg/2013/07/power-of-disciplined-savings-and.html)

What's constitutes a good financial plan?

• Protection for the entire family due to unforeseen events like Death, Critical Illness, Hospitalization etc.
• Managing your cashflow for today's and future needs.
• Maximize your investment returns by planning your taxes effectively and starting early.
• Planning for financial needs like emergency savings, kids education and retirement.
• Estate planning and causes you care about.

I believe in doing it right and doing it once. Financial decisions which requires review every couple of years would end up disastrous, so it's important to understand the bigger picture and plan once. The only thing would be to review the investment decisions to make sure you are getting the maximum returns. Let's delve a bit more into the details of each of above aspects for better planning.

Risk Management :

Health Insurance :

Most of us are dependent on the corporate cover for the health insurance, but many times we aren't aware of the limitations of those plans. It's good to consider these as bonuses but plan for a comprehensive independent cover which is adequate enough to cover for major hospitalization expenses.

Eg : 15 Lakhs and above for India

        $200K and above for countries like Singapore, US

Critical Illness :

This is an income replacement option for major illnesses like Cancer, Heart Diseases etc. Hospitalization protection would cover the hospital expenses but this will help to cover the possible loss in income as the company will not pay beyond a certain point.

I would advise 3 years of monthly expenses as an adequate cover.

Eg : Monthly Expenses : $8,000.

        Adequate Cover : $300K

Protection for Life :

This is similar to critical illness but require income protection for the family for a slightly longer duration. It's difficult to replace the emotional stress that family should go through due to unforeseen circumstances, but at least we could ensure financial security for the family. An adequate cover could be either for at least 20 years of monthly expenses or the kids start earning.

Eg : 

For a 40 year old person, 20 years would provide an adequate cover.

Monthly Expenses : $8,000 / Rs 1 Lakh

Adequate Cover :  $2 Million / Rs 2.5 Crores.

The most common thing i notice with life protection is the quest for returns on all insurance options. More often that not, it's impossible for people to meet the entire needs with an Endowment or Investment linked plan. The very reason of buying an insurance option is because of the probability of an unforeseen thing happening and the family should be really benefited in such a situation. I have seen many allocating considerable premiums but the total cover isn't adequate due to the nature of the plans. It's always advisable to cover for the maximum possible with pure term before you look at the endowment options, based on individual's affordability.

I shall cover the details of the wealth management aspects in the 2nd part of this post..

Cheers

Referrals Are the Best Compliment You Can Give Us

+65 8113 3272