All asset classes have witnessed ups and downs in the last 20-odd years so one cannot say that any asset class is a safe bet believes Nandan Chakraborty, MD-Institutional Equity Research, Axis Capital.
Talking to CNBC-TV18, he says public memory is short-lived and people believe that assets like gold and property have been rising forever. However, given the current scenario of persistently high inflation where these seems to be the perfect hedge, one cannot blame them.
"Looking at the movement of asset classes post-liberalisation, that is, from 1991 till date, gold has gone up 14 times. In the same period, without counting dividends, some stocks have given less returns than gold, but a lot of them have given better returns than the metal like Sesa Goa, which has given 1000 times. So returns from certain stocks have outperformed gold over a period of time," he elaborated.
But he feels that timing the stock market is of primary importance. No matter how good a stock is, one should time entry and exits to maximise returns.
Meanwhile, given the huge liquidity present in the global markets today, implies that there is a huge problem in the fundamentals of the world, he cautioned.
Here is an edited transcript of his discussion with CNBC-TV18
Stocks is all about buying and selling at the right time. You buy the right stock at the wrong price - that is not on. So, this is a simple graph which says over a long-term period how stocks do. It is very difficult to forecast the short term in stocks. Talking about property, this taken from HDFC. So, I assume they are talking about Bandra where prices are quite sticky, I don’t not for sure, but this is the average price and what we have done is just indexed it to 100 in 1995.
There have been up’s and down’s in property. The reason I am giving you such a 20-year perspective is public memory are short and people believe that things like gold and property and so on have been rising for ever.
The conventional school of thought that gold and property are the best bets today, given the market volatility due to political uncertainty and other factors, may not hold true in all cases as returns from certain stocks have outperformed gold over a period of time.
All the gold in the entire world would roughly fit a cube which is roughly a tennis court. Warren Buffet said three things about gold. This cube of gold will produce nothing in hundreds or even thousands of years. A fraction of gold goes into things like dentistry and so on and so forth.
Secondly, it will not pay you any form of recurring income or non- recurring income, interest, dividends whatever. Third, he says you can fondle the cube but it won’t respond.
This cube will cost roughly about USD 10 trillion. This USD 10 trillion can buy all the crop land in America which is roughly 400 billion, 16 Exxon Mobils, and you would still have USD 1 trillion left.
So, what Buffet says that over the next 100 years, your crop land and Exxon Mobil’s would produce trillions of dollars of dividend and you would still have them at the end of the century. At which point, you could probably sell them for vastly more than the USD 9 trillion that you bought them for. This is important Buffet’s take on gold.
I am not saying that you should not buy gold at all. All of us have gold. But gold is a specific type of investment. You cannot compare gold with stocks and fixed returns, each of them have their own place in the scheme of things. The allocation is what you need to go to financial advisors for.
Gold usually goes up when there is crisis anywhere in the world. So, when there is a Middle East problem or when there is inflation. It is not that every housewife calculates inflation, it is just that it goes up because of inflation and then it is a price action.
Gold has its own place, it is sticky, and has been secular for the last so many years. For the last 10 years because of massive liquidity coming into the system because of major problems in fundamentals. So, when there is war, when crude oil prices go up, to fight the war you need lot of liquidity and that’s when gold goes up.
But there is no surety, and you can’t predict when it will end. If you keep chasing price action, it could well be that you buy at the wrong time and you make a lot of loss in gold.
Look at equities on the other hand. From 1986 to January 2013, there were a number of major events which could have been really frightening for equities. There has been a Gulf war, securities scams, nuclear tests, sub-prime crisis and the end of it all, look at the performance – it is almost zero in 1986 to where you are now.
Let’s talk a few minutes about global flows. Why is this massive liquidity on? This liquidity is to solve a problem which is very difficult to solve because it is a political one. How do you admit to a country that you kept making mistakes – let’s talk about Greece or Iceland or whatever. How do you admit that you kept making mistakes as a government and as people, and now the current generation will have to pay for those mistakes.
Since you can’t do that, what you do is try and continuously postpone the problem - the clichéd word is kick the can. So, what they have tried to do is print massive amounts of money to deluge the problem. So, the very fact that there is huge liquidity means that there is a huge problem in the fundamentals of the world.
What is different between this quantitative easing (QE) and the prior QEs? The difference is that the central bank balance sheets are expanding now at a time when the private balance sheets are deleveraging. In the previous QEs, lot of the money was actually sucked in by consumer and the government itself.
Hence, the latest round of liquidity is likely to flow into other riskier assets also. The riskier assets include the Indian stock markets on a global context. It is among the few times in the world that gold and crude have gone down together. Usually one is a risk on trade and one is a risk off trade.