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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  • Originally Posted by sethugm
    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) .


    Final point about slaigram is true. People will anyway visit this area in night hours. Decent people can not stay
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  • Originally Posted by wiseman
    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

    Wiseman, I was actually not wanting to write but your write up did stir me to write!
    1. Yes you are right that RE lags Stock market by about an year to an year and a half. So the top of Stock market in Jan 2008 should imply that top of RE should be in mid 2009. However you were crying about its fall much earlier. So you are regularly writing new stuff to contradict your old stuff. All you seem to want is that RE collapses by hook or crook.
    2. Regarding the Call options. That is exactly what I try to do. However while mathematically you can tell many things after it has happened how many anticipate the right move? Anyway I wont be troubling you too often on this board in the future, so you can state whatever you want. Do read my passing comment in another post.
    Bye.
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  • Stocks lag US stocks

    Stocks from all other countries lag the US stocks and Indian stocks lag the US by about 6 months and prior to the US stock fall the US economist will be talking as to why the US stocks will fall at a particular time this time it was the auto sector downfall due to high oil prices (Americans love their gas guzzling buggies) caused foreclosures of a speculative RE market and hence the banking sector going defunct. If you followed this you should have got out of RE in India by mid 08 the latest.
    Can
    Good to see you guys Nat and wise being a bit civil

    Originally Posted by Natarajg007
    Wiseman, I was actually not wanting to write but your write up did stir me to write!
    1. Yes you are right that RE lags Stock market by about an year to an year and a half. So the top of Stock market in Jan 2008 should imply that top of RE should be in mid 2009. However you were crying about its fall much earlier. So you are regularly writing new stuff to contradict your old stuff. All you seem to want is that RE collapses by hook or crook.
    2. Regarding the Call options. That is exactly what I try to do. However while mathematically you can tell many things after it has happened how many anticipate the right move? Anyway I wont be troubling you too often on this board in the future, so you can state whatever you want. Do read my passing comment in another post.
    Bye.
    CommentQuote