Source: Economic Times

Where to invest in deflation
21 Mar 2009, 0200 hrs IST, Prabhakar Sinha, TN


NEW DELHI: The country is facing a negative inflation or deflation scenario with inflation touching near-zero level of 0.44% and expected to go

down further in coming weeks. If negative inflation sustains for longer period of time, it will affect economic activities and in turn performance of most of the companies.

In the current scenario, prices are falling not because of improved productivity but because of fall in demand. If deflation sustains for longer period of time, it will have a more adverse impact on demand. "Deflation results in less demand, lower production and weak economic growth," said Citibank in a report "India Macroscope''.

A negative inflation discourages investments in the economy. The real interest rate difference between nominal interest rate and inflation becomes very high, making funds costlier. As demand goes down, capacity utilization of manufacturing units declines. This discourages investment in capacity expansion.

As performances of companies will be hit, the Citibank report said investors should be selective while making decisions in deflationary environment. It said invest in those companies whose products or services are not much affected by fall in demand. So, companies operating in health care, telecommunication and utilities like electricity distribution could be good bet to invest. Services of these companies will remain in demand even if the economy slows down.

Investors also need to identify those companies where decline in prices lead to increase demand for their products, prompting them to produce more value-added products with greater economies of scale. In this category, companies operating in sectors like snacks and beverages, health care, utilities and telecommunications can be included.

Companies with strong balance sheets, which do not have much debt on their books, can also be considered for investment. As debt servicing would become difficult in the deflationary time, one should stick to companies (mainly in IT, health care and energy sectors), which are less leveraged, the report added.

The report pointed out that total investment in the economy may decline by 2 percentage points of GDP by 2010 to 35.7% from 37.1% in the current financial year.

At the same time, companies operating in capital goods sector should be avoided. Capital goods are required when companies are investing in either new projects or expanding existing facilities. But, as companies are avoiding both, the performance of capital goods companies may further dip.

The real estate companies should also be avoided. In deflation, the general perception is that the prices will further fall. So, home buyers will further postpone their purchasing decisions, which will further increase the suffering of the cash-starved real estate sector
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  • Sanjay Sinha, the CEO of DBS Cholamandalam-

    Real estate stocks, which has already corrected so much, could still show some downside risk. This would be primarily on account of the fact that the current housing prices have still not corrected sufficiently. When property prices come down, then it could spark demand. This in turn would cause the sector to bottom out.
    CommentQuote
  • Originally Posted by BigBear
    Sanjay Sinha, the CEO of DBS Cholamandalam-

    Real estate stocks, which has already corrected so much, could still show some downside risk. This would be primarily on account of the fact that the current housing prices have still not corrected sufficiently. When property prices come down, then it could spark demand. This in turn would cause the sector to bottom out.


    Dear friend,

    All the people await price corrections. The corrections seem to happen through out India but not in Chennai within or near the centres. In the city areas the prices have only come down marginally or continuing. Of course, in the out of city areas, the prices have come down even to the tune of 25 to 30%, but not in city areas. The promoters still hold on to the prices. I know of a promoter in Saidapet ( I..... ) who when he started the project about 2 to 3 years back sold at about Rs. 2500/sq. ft. now quoting Rs. 4750 /sq. ft. which was quoted at Rs. 4500 sq. ft. some 6 months back. People who booked initially for about Rs. 30 lakhs a 3 bed flat are now quoting not less than Rs. 80 lakhs? This builder in the case of his Urapakkam Project has substantially reduced the prices, being outskirt area so as to sell the flats. Where do we go, one side we say downtrend, prices are coming down and on the other side either the prices stay or even getting increased? I also know about another project in Saidapet, near the subway from the Alandur side, 2 bed flats of 12 nos. quoted at Rs. 4500/sq. ft. and sold within weeks of launch? The running rate is not less than Rs. 4500/sq. ft. in most Saidapet areas now. It is not coming down as well as no flats are even coming out for rental?

    ks2071746
    CommentQuote
  • During deflation we can expect prices to come down, and to realize more value for money.The 50paise and 1 Rupee will be respected more.

    with construction cost coming down we should also see RE prices coming down.

    Having said that, isnt it a paradox?

    Now Government is anouncing fiscal stimulus packages and RBI is cutting down key rates like repo and reverse repo and cash reserve ratio(CRR) periodically to infuse more liquidity in the market.

    with all this efforts, one should ideally expect inflation to stagnate or increase but the opposite is happening.

    Does this mean that the banks are not lending the excess money and are instead using them to keep running and absorb bad loans and mortgages?

    Will this excess money only reflect in fiscal deficit and have no effect on the economy?I am lost.

    Hope someone can answer and help me understand.Thanks in advance.
    CommentQuote
  • Originally Posted by ks2071746
    Dear friend,

    All the people await price corrections. The corrections seem to happen through out India but not in Chennai within or near the centres.
    ks2071746


    At some places corrections are not happening because the promotors have bought the land when it is at peak and they are not able to make it down.

    But after some time they have to forego some margins and prices will be down

    Promotors who buy land now will offer flats at less prices
    CommentQuote
  • Originally Posted by nabishek
    During deflation we can expect prices to come down, and to realize more value for money.The 50paise and 1 Rupee will be respected more.

    with construction cost coming down we should also see RE prices coming down.

    Having said that, isnt it a paradox?

    Now Government is anouncing fiscal stimulus packages and RBI is cutting down key rates like repo and reverse repo and cash reserve ratio(CRR) periodically to infuse more liquidity in the market.

    with all this efforts, one should ideally expect inflation to stagnate or increase but the opposite is happening.

    Does this mean that the banks are not lending the excess money and are instead using them to keep running and absorb bad loans and mortgages?

    Will this excess money only reflect in fiscal deficit and have no effect on the economy?I am lost.

    Hope someone can answer and help me understand.Thanks in advance.


    Abishek,
    What you said is true.Banks are not willing to lend to some sectors like RE,vehicles fearing their NPAs to increase.Also the defaltion is due to demand destruction caused by the economic turmoil bcoz people are not willing to spend money fearing job loss.People who had not lost their jobs are also curtailing their expenditure after seeing their friends and relatives losing jobs.Thats what happened to Japan in 90's and they were in deflation for more than 2 decades.
    CommentQuote
  • Originally Posted by Nataraajg007
    At some places corrections are not happening because the promotors have bought the land when it is at peak and they are not able to make it down.

    But after some time they have to forego some margins and prices will be down

    Promotors who buy land now will offer flats at less prices


    Dear friend,

    If it happens, it will be good for the buyers. But this may take time as the promoter would not have paid the land cost to the owner, but would have got only letter of authority from the owner to sell to the flat buyers the UDS and their cash out to the owners could be only when the land registraton takes place. Still, neither the owner of the land nor the buyer of the flat will ever know the cost of land from the owner or the sale price of land-UDS added up. The sale completion also may take time. So the ultimate beneficiary will be the promoter only and if the prices go down, they will take up with the owner to reduce the sale consideration so that the margin of the promoter is not greatly affected.

    ks2071746
    CommentQuote
  • Originally Posted by ks2071746
    Dear friend,

    All the people await price corrections. The corrections seem to happen through out India but not in Chennai within or near the centres. In the city areas the prices have only come down marginally or continuing. Of course, in the out of city areas, the prices have come down even to the tune of 25 to 30%, but not in city areas.
    ks2071746


    KS ,

    Its very evident as many of the Govts/Experts/FinGurus/Forums/Magazines have accepted the slowdown and RE prices are falling by 15-50 percent and there are more chances that the free fall will continue for 2-3 years.

    Other forum which discusses all the projects in OMR states the real correction happening in Chennai and that forum is well organised by Admins who take able steps to project the correct/current scenario.

    The guy who write pages of false stories here was chased away & thrown out of that forum.Those guys have taken asylum here knowing there are no admins in this forum.

    Just because 2-3 people state that RE is appreciating , does not mean that RE is still ruling.A good post mortem will help RE to stabilise but claiming its still alive will cost more victims.

    DLF & all other projects in that forum have discussed the slowdown and grouping together to bring down the price already agreed.

    Friend of mine evinced interest for a property (behind IIT - am not sure of the exact location - but can get & update for the benefit of all) quoted Rs 48 lakhs some time back and the builder is now ready to sell it for Rs 28 Lacs (and says still negotiable - 41 Percent eroded).

    If one looks at the projects in OMR area , all they are located well 1-2 KMs inside the OMR as promoters and builders were initially offloading the interier locations thinking they can command a high premium for the developments close to OMR.But due to the liquidity crisis new projects will be developed within 1 KM from OMR to raise quick money .DLF L&T and many major projects are developed well away from OMR. They cant compete with the new projects close to OMR . Majority of the interior projects will die or prices will plunge.

    With increasing prices and pollution/distance/TravelExpense(Rs 400 for AutoFare) , people will migrate to projects located close to the workplace from city area. Places in city limit will lose its importance due to exorbitant prices & increasing pollution/distance/TravelExpenses/TravelSafety.

    Given the huge availability of Apartments/lands & 90% of IT/ITES located in OMR , More and more people will move to locations closure to the workplace . The city RE is plunging from its heavily inflated prices.

    But Saligram will not lose its importance as some people will visit this place in the after office hours (with varied frequency/demand) .
    CommentQuote
  • Dear friend,

    Good analysis. By the by, what is so special about Saligram and why you say people do frequent this locality? I remember, this is one area which got affected in the flood situation a few months ago and even water logging was there to a level of 4 to 5 feet.?

    ks2071746
    CommentQuote
  • Originally Posted by ks2071746
    Dear friend,

    All the people await price corrections. The corrections seem to happen through out India but not in Chennai within or near the centres. In the city areas the prices have only come down marginally or continuing. Of course, in the out of city areas, the prices have come down even to the tune of 25 to 30%, but not in city areas. The promoters still hold on to the prices. I know of a promoter in Saidapet ( I..... ) who when he started the project about 2 to 3 years back sold at about Rs. 2500/sq. ft. now quoting Rs. 4750 /sq. ft. which was quoted at Rs. 4500 sq. ft. some 6 months back. People who booked initially for about Rs. 30 lakhs a 3 bed flat are now quoting not less than Rs. 80 lakhs? This builder in the case of his Urapakkam Project has substantially reduced the prices, being outskirt area so as to sell the flats. Where do we go, one side we say downtrend, prices are coming down and on the other side either the prices stay or even getting increased? I also know about another project in Saidapet, near the subway from the Alandur side, 2 bed flats of 12 nos. quoted at Rs. 4500/sq. ft. and sold within weeks of launch? The running rate is not less than Rs. 4500/sq. ft. in most Saidapet areas now. It is not coming down as well as no flats are even coming out for rental?

    ks2071746


    Dear KS,

    RE has busted in most of the countries from US,UK,Japan,Dubai,South Africa,China and if people think India can escape this it is nothing but wishful thinking.Bcoz the main reason for the property bubble is the easy avilability ofcredit overseas which also flowed to India.If that is reversing Indian RE shouls also fall.
    CommentQuote
  • Today mostof the index stocks rose more than 5%.DLF was the sole loser among the index stocks. The scrip ended with a loss of 3% .Early pointer to things to come!
    CommentQuote
  • Originally Posted by BigBear
    Today mostof the index stocks rose more than 5%.DLF was the sole loser among the index stocks. The scrip ended with a loss of 3% .Early pointer to things to come!


    You are right.

    But tomorrow index will fall by same percentage as people start booking profit.RE scrips will further fall tomorrow also.

    No RE company could register 25-30 % of the booking what they have done in 2007 . Post BearsStern/Lehman/ML fall , the Indian IT companies losing new contracts/reduced billing , absolutely no booking but there were good growth in people wanting to exit.
    CommentQuote
  • RE and Stock market are two different beasts. Infact DLF was falling while the market was moving up today. So RE can move up when markets fall! Ofcourse people who want market to fall will continue to wish the same but foolish wishes are not granted!
    CommentQuote
  • Incidentally beggars wish they become prosperous but how often does it happen. Only GM of Sethus can tell!
    CommentQuote
  • Can you do this in the RE market?

    Originally Posted by BigBear
    Today mostof the index stocks rose more than 5%.DLF was the sole loser among the index stocks. The scrip ended with a loss of 3% .Early pointer to things to come!



    Folks,

    This is the fundamental difference between the Stock and the RE markets.

    Stock Markets: Well Regulated, Highly Liquid, Retail Sizes, Low Leverage (except with safety features like in F&O). Quick to rise and Quick to fall to reflect real economy. Leading Indicator of Economic Health!

    RE Markets: Not at all well regulated. Highly Opaque with no realistic Price Discovery mechanism. Large deal size. Very high leverage! Very slow to rise as well as fall to reflect real economy direction. Lagging Indicator of Economic Health!

    What the RE Stocks (builders) show on the Stock Markets will invariably follow in the RE markets after 9 months upto 2 years. This is because Stocks lead by 9 months and RE lags by 12-15 months or so. Add them up and you see the time it takes for the RE markets to follow RE Stocks.


    Finally, Nats, show me if you can do this in the RE market with such ease and liquidity:

    Opportunity:
    Nifty 2700 Call Option expiring 26 March, showed an attractive buying opportunity at Rs.22 on 9th March (my proprietary math was strongly urging me to get in on that day and I did!).

    On Friday it closed at Rs.114 (518% gain). Today it closed at Rs.240 (1090% gain in 14 days.). Warning. Those who don't understand this, don't try it!!!

    A man who put Rs.11000 in it on 9th got out today at Rs.108000. Who knows what tomorrow will bring? :D

    I can prove to you that a person could have start with the right algorithms and Rs.20000 in August 2008 and ended up with Rs.1 C today after only 6 months without taking too much of a risk trading in the F&O market. But the trick is to have the right math! :D

    Just an indication that there are many, many avenues to make money now-a-days.

    cheers
    CommentQuote
  • re will fall

    re will fall but with atime lag to stock market
    people have to understand
    CommentQuote