Uncertain times - How to cope with it?

We are living in an era of unprecedented economic and global uncertainty. The era of stupid and easy money is clearly over and this has been amply demonstrated by the fall of legendary Wall Street Firms, insurance companies, mortgage institutions and banks in the US.  The equity markets and its constituents have understood and acknowledged this fact. This can very well be seen from the collapse of equity markets across the world.

However one sector and its constituents (namely builders, real estate agents and even individual sellers) have still not accepted the reality of lower housing prices.

Most individual sellers in the real estate space are anchored at a particular price point that they have witnessed in the past. For e.g. A leading Mumbai developer was offering residents of a 550 sq.ft Rs.1.65 crore (30000 per sq. ft.) in Andheri (W) just because the place was close to the Metro. People however wanted more and expected Rs. 2 crore. The developer shelved the plans in November and everyone in the complex missed the bus. Now occupants of the premises are anchored at the previous offer and say that we will only sell when we get Rs. 1.65 crore. However good the location (I personally think it's not that prime), it will probably take a decade for real estate prices to reach these exorbitant levels. Prices in most places today have corrected by 30% and in some cases more but there are some developers who still like to believe that lower interest rates will spur demand and hence are not cutting prices.

Real Estate Demand however is not just a function of interest rates but also of prices, perception of job security and economic prosperity. Though interest rates will go lower, prices are still high and job security low. There is a lot of genuine demand even today but at a fair price. This was amply evident by the response to the recent MHADA offer for residential apartments. People stood in long queues just to collect and then deposit the application forms. In short the response MHADA received was stupendous. Developers should take cues from such events and price their projects reasonably. Just because you have paid a high price does not mean that home buyers will be willing to pay these crazy prices. Sometimes to survive, it pays to book losses early and exit. There will be more avenues to make money but for now the question for developers is of survival.

Also read - Can I really cash the crash?

HDFC Real Estate PMS (a Real Estate Portfolio Management Scheme launched in early 2008) on the other hand has done extremely well and they have locked in some excellent deals. This scheme based on the initial disclosures made will deliver handsome returns.

The question on everyone's mind today is "What should we do now? Equities are down and Real Estate is on its way down. On top of this there is no job security.

Where should I put my money?

First and foremost ensure that you have sufficient cash reserves to survive for several months without a pay check. Work hard to ensure that you are an asset to the organization. Reduce your expenses and defer all unimportant and discretionary spending. Second take a hard look at where you are today and define your financial goals atleast for the next 3-5 years if not for 20-25 years. Third transfer all risks such as hospitalization, accident and death to an insurance company if you need to.

Also read - Personal risk and how to manage it!

Let's take a quick run down on every asset class and assess its potential from here on. 

Equity market indices are extremely volatile however they are unlikely to witness a sharp crash of 30-40% from these levels. However individual stocks and especially those that are poor on corporate governance and disclosure norms can go down by even 50-75%. The equity index as a whole is likely to be range bound and global news, local budget, Q4 earnings and more importantly FII flows will drive the market. The strategy to be adopted is to create a core portfolio of sound large cap companies with a good growth visibility, low or zero debt, free operating cashflows and an excellent management team.

Residential as well as Commercial Real Estate will witness severe pain in the next several months and one could see 2005 price levels soon. Don't rush to buy a property just yet but look around bargains and distress sales. At 2007 prices, it made a lot of sense to rent but if prices were to correct further and we are down to 2004-2005 prices, it would certainly make sense to buy. Just ensure that your EMIs are comfortable and there is a solid buffer to save a tidy sum every month post expenses and EMIs.

Gold has the potential to do well and hence buy on every sharp correction from the current levels. However opt for Gold ETFs instead of Gold Jewelry. Gold Jewelry is not an investment because besides higher transaction costs, jewelers do not even buy back gold if prices are high. Today if you go to sell your old jewelry they will not just cut transaction costs but also quote a much lower market rate.

In the debt space, income funds are still a good option from a 6-12 month perspective. However there is a lot of volatility even in the government securities space and hence timing these investments will become extremely crucial.

Finally it is important to understand the basic, avoid any complex and too good to be true investments and manage your expenses prudently. Irrespective of the asset class and investments chosen, the key is to have a sound financial plan and investment strategy based on your needs and overall financial situation. In short, your financial plan should help you win the financial marathon of your life.

- Amar Pandit

The author is a practising Certified Financial Planner and runs "My Financial Advisor" www.myfinad.com. He can be reached at amar.pandit@moneycontrol.com

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