Wednesday, December 18, 2013

Government elected in May 2014 will have just 90 days to get its act right.

With politics in election mode, there is uncertainty over short-term economic performance. But there is no guarantee we will have policy clarity even after the elections in April-May 2014. 

Even assuming we have a pro-growth, pro-reform government, the window of opportunity available to it will be open for a very short time: just 90 days. This is because governments in India have to be in election mode almost every other year. Remember UPA-2, which was re-elected with a better mandate in 2009? Within one year, it had lost its footing, and has never recovered from that. 

The government elected in May 2014 will have just 90 days to get its act right because the rating agencies will be holding a gun to its head. And it will have to act fast despite knowing that the outgoing UPA has booby-trapped the economy by legislating all kinds of bad laws. 

Both Moody’s and Standard & Poors (S&P) have warned of a rating downgrade once the next government comes to power. 

Moody's gave India a warning two weeks ago that if growth does not revive, inflation does not come down, and the fiscal deficit is not contained, India's sovereign credit rating will be downgraded. More specifically, it warned that the government should not be adopting policies that harm fiscal prospects or make banks run up more bad loans. 

Earlier, S&P said that it was holding back on a likely downgrade to see if the next government was able to come to grips with the country's economic problems. If it does not, India’s rating will move below BBB- the lowest investment-grade rating, below which Indian borrowings will be treated as junk. 

When a country's investment rating falls below BBB-, large foreign pension and mutual funds cannot invest in these markets, and lenders will start charging more from Indian borrowers. This will raise borrowing costs for everyone, and slow down growth further. What this boils down to is this: the next government will have to behave as though it is 1991 and act very fast. In its very first budget it will have to signal major economic liberalisation and big policy changes. This could mean freeing oil, gas and coal prices, opening up foreign investment in more areas, selling off majority stakes in government companies, and reducing government rules and regulations, among other things. If this is not done, a rating downgrade will be like a noose around the next government’s neck. 

Any government, whether it is one led by the BJP, the Congress or even a regional party, has to do everything in its first budget - which can be expected around July 2014. Otherwise, it will miss the bus. This is because even before it settles down, it will be up against the state assembly election cycle, making unpopular decisions impossible to implement. 

For example, soon after the Lok Sabha elections will come the Maharashtra assembly elections in October, where the BJP will find it difficult to win if the Thackeray cousins – Raj and Uddhav – are going to be fighting one another. The Jharkhand elections are also due in December 2014. In 2015, there will be the Bihar elections, where the BJP will be trying to oust Nitish Kumar. And so on. If the next government does not signal a dramatic enough change in economic policies in its first 90 days, the window of opportunity will close. 

No government today can hope to have a honeymoon period of more than six months to one year when the electorate will forgive tough decisions. This is why UPA-2 faced enormous problems after wasting its entire first year (2009-10) doing nothing. After that one scam after another was unearthed, and soon the government lost control of the economic agenda. 

Even in the 1990s, when PV Narasimha Rao and Manmohan Singh earned their reputations as reformers, the 1992 budget signalled the slowing of reforms. And after the Congress party faced state-level electoral reverses in 1993, reforms were brushed under the carpet. The moral of the story is simple: given India’s regular appointment with state-level elections, new governments at the centre have very little time to perform. If the big decisions are not taken in 90 days after a new government is formed, it will face the same troubles as UPA-2. Speed is the only way to reform and economic rejuvenation. With every passing year, public patience is shortening. Honeymoon periods for governments are shortening. 


Sunday, December 15, 2013

Circling back to silver fundamentals.

Beyond the typical underlying changes in money supply there are very important elements of demand that continue to push the price of physical silver higher and higher. This is despite the fact that silver has been money for much longer then gold.

One element is the elasticity of demand for silver, particularly in the manufacturing of electronics. Silver is the best conductor of electricity known to man and even at a current prices, it is very inexpensive for use in consumer electronics.

Silver Inelasticity

Silver cannot and will not be replaced by the industrial sector as a conductor of electricity for two reasons: 1) it is relatively inexpensive, and 2) it is the best product for the job.

When a computer manufacturer begins to source components to build its consumer products, the company buys tons of glass, pounds of silicon, and tiny amounts of silver.

When you buy a computer that costs $500-$1,000, it contains, at most, 1 gram of silver. Most computers contain fractions of that amount, for a maximum cost of $.60.

Even if silver were to explode in price from $18 per ounce to $180 per ounce (which is a dramatic change) the price of the silver component in a computer would grow from $.60 to $6.

Thus, even after silver explodes in price, the computer manufacturers will still be very much willing to use silver since $6 on a $500 computer is just 1.2% of the price.

Technological Improvements

Silver's demand can easily be contrasted with the emphasis on technology during the past half century.

Prior to World War II, very few homes owned electronic devices and silver's industrial use was limited to only photograph development.

In contrast, the post-war family owned microwaves, TVs, toasters and other appliances including washer and dryers – which all contain silver.

And even in the past decade, the average consumption of silver by the average person has grown.

Today, each person owns a cellular phone, TV, computer, monitor, printer, router and a myriad of computing peripherals that all contain silver.

It is without question that demand for silver as an industrial metal has exploded with technological achievements - but the biggest use for silver is just now being uncovered.

Government Stockpiling

Many argue that gold is held by government and central banks by proxy, as the line between the two becomes evermore foggy. Therefore, gold is the better monetary asset. Central banks and governments don't stockpile silver - mainly because there is not enough to accumulate. More importantly, silver isn’t stockpiled because the resulting price adjustment could break the financial system.

What is fascinating is that, even in the realm of vast money creation and decades of dangerous policy that threaten the world financial system and underlying economy, central banks are still held to such a high standard. In effect, they are deemed immutable. The fact is that central banks fail right alongside the currencies they create from nothing.

Today's biggest technological feats are all painting a pretty picture for silver. They also serve to aid in the establishment of a much higher market price in the future - with or without monetary inflation or the stockpiling of central banking gone awry.


Saturday, December 14, 2013

Bungalows versus flats.

Assuming that one has the financial wherewithal for this to be an option at all, the question of whether to invest in a bungalow or a flat is indeed pertinent. As always, location plays an important role. 

In an established area of a large city like Pune, a bungalow costs a lot more than a flat. This means that the rental market for such a property shrinks proportionately. However, the income segment that remains can definitely afford to rent such a unit, so demand would remain more or less consistent. Moreover, bungalows in established locations have a high chance of attracting long-term corporate leases. 

Bungalows Established Vs. Upcoming Locations 

Investing in a bungalow in an upcoming location usually involves a lower (though still sizeable) capital investment. The rental yield is lower, but the size of the rental market for such a property increases proportionately. 

Investment in a bungalow in such a location can make a lot of sense if the area, despite being non-prime, is still well-connected to some of the city’s major economic drivers, such the airport or employment hubs such as IT parks and manufacturing zones. One major advantage of investing in a bungalow in an upcoming location is that it will gain steadily in value as the area’s profiling in terms of social and civic infrastructure improves. However, regardless of location, the maintenance costs and property taxes involved in a bungalow are a lot higher than those of flats. This long-term financial implication must necessarily be factored while investment in a bungalow is considered. 

Share Of Land 

If we set the considerations of location, ticket size and potential rental yield aside, the primary advantage of investing in a bungalow rather than a flat is that one secures more land. In any location, it is the value of land which determines the value of built-up property. Unlike a flat, a bungalow and its compound lock in a significant piece of tangible land. This fact gives a bungalow a higher value in real estate terms. Also, the investor must have a suitably long investment horizon and not be looking for short-term returns. 

Investing in flats 

Flats offer a slightly different value proposition than stand-alone units such as bungalows. In the first place, the share of land that is legally allotted to each flat in a project is much lower than that of a bungalow. The primary value of a flat lies in the space that it occupies, which is why larger configurations such as 3 and 4 BHK attract higher rents. As before, location will dictate the ticket size as well as rental income. The rental market for flats is much larger than that of bungalows, so finding tenants is easier even if one factors in a certain degree of tenant churn. However, one must ensure that one is investing in a flat whose size dovetails with the median income profile of the location. The highest demand will always be from the locality itself, and from people working in offices and industries close to the area. Buying a flat whose size puts it out of the largest local demand profile can be a self-defeating and costly mistake. Generally, the 1, 2 and 2.5 BHK configurations are the safest investment bet in any area, since the rental demand for them is always the highest. With ultra-premium flats as a logical exception, maintenance and property tax for apartments is significantly lower than for bungalows. 

Flats Established Vs. Upcoming Locations 

In terms of location, investors into flats must consider all the pertinent factors carefully. Flats in established locations are costlier and involve a higher capital expense. They will attract rental interest from a segment of higher economic profile. However, it must be borne in mind that capital appreciation of flats in centrally located projects is slower than in many upcoming areas. This is because high-end locations tend to hit an appreciation plateau, which can persist for long periods. Upcoming locations appreciate faster because their market viability is being enhanced with increasing accessibility as well as social and civic infrastructure. They attract more people, since any city’s growing population tends to move into areas which are affordable. For that reason, emerging locations also tend to attract a lot of commercial establishments which further boosts the residential segment. To ensure that growth factors such as assured infrastructure and social amenities are indeed locked into place, investors into apartments should ensure that they choose projects that fall within the local municipal limits. If a project falls outside the city's corporation limits, there is no guarantee that the location will receive proper infrastructure such as roads and regular water and electricity supply. Without such infrastructure, a location does not appreciate thereby rendering it unsuitable for smart property investment.