The Budget to be presented on February 26, 2010 is one of the most important economic documents the United Progressive Alliance [ Images ] government will present in a long time. Over the past five years, though important, Budgets have not had the potential signalling impact that this upcoming event has acquired.
First of all, this upcoming document has come to be seen as a litmus test by foreign investors on the seriousness of the new UPA government to move ahead on structural reform.
There can be no more excuses; the finance minister got away last time by citing the limited time available to present Budget 2009. He deflected the need to present a credible game plan to bring the fiscal deficit under control, citing the pending (at that time, but since submitted) 13th Finance Commission report.
The policy-makers talked of doing reform throughout the year, and not bunching it all up in one Budget document; well, that bluff has also now been called over the last nine months.
Investors want to see intent on policy reform, willingness to bite the bullet and take some hard decisions as well as awareness that we have a serious fiscal problem.
Nobody wants to see yet more committees set up, lip service to how this deficit is unsustainable, but no action.
The minimum investors will want to see is a credible plan to cut the fiscal deficit, which actually leads to structural changes on both revenue and expenditure side.
Can there be movement on things like the Parikh committee report, a nutrient-based subsidy framework for fertilisers, further targeting of food subsidies? On the revenue side, will we get a credible date and structure for the GST, where are we on the direct tax code?
Attempts to bring the deficit down by recasting the GDP data, and assuming high growth rates will not cut it. Investors will, in my opinion, not react positively to a deficit-reduction plan which is in effect a simple and blind bet on high growth.
This is seen as too risky, as any slippages in growth for whatever reason can have very serious fiscal and economic consequences.
The importance of these structural issues is due to the need to cut the deficit and yet not harm growth. Structural reform like GST is so critical, as it will plug revenue leakages and thus boost growth, corporate profitability and economic efficiency simultaneously. Similarly, with the direct tax code, one has the chance to clean up exemptions, raise effective tax rates and improve productivity and efficiency.
The fear with cutting the fiscal deficit in OECD countries is the huge economic cost, as already weak growth impulses will get further crushed. India has a unique opportunity of being able to streamline and improve its tax structure, which will generate strong revenues and boost growth.
Cutting the fiscal deficit in India's case does not necessarily have the negative economic consequences of the OECD world. Our tax structure is warped enough, so that, if improved, it allow us the opportunity to fundamentally strengthen the economy.
Investors have cut India a lot of slack on the deficit, partly due to global circumstances -- when the whole world is running double-digit deficits, why single out India -- not realising, of course, that our double-digit deficit has very little to do with the global financial crisis, and everything to do with our own structural problems.
High growth and the admittedly-credible resilience of the Indian economy in 2008-2009, when the world was imploding, have also taken the focus off other structural issues like the fiscal. Investors are, however, a fickle lot, all you need is a surge in the oil complex, or a Greece-type situation to remind everyone of India's macro vulnerabilities.
We have already gone through a bout of this in 2008-2009, when our current account position came into question with oil prices surging past $125. We are too dependent on external capital to let this happen again. Even though we fully fund our deficit internally, external capital is important to fund incremental growth.
I already detect a lack of patience now building up, investors want to see action. There is nervousness among the investor base, given the events of the past few months.
The 3G auctions seem to be delayed once again, with absolutely no visibility on timing, so that is Rs 30,000 crore gone. The GST implementation is also delayed and caught in procedural and state-level issues, with again limited visibility towards time frame. The government remains committed to new social sector programmes like the Right to Food Bill, thus expenditure pressures continue.
The NTPC follow-on public offer was not particularly encouraging either, having been effectively bailed out by certain large public sector investment institutions. Not a particularly great start to an aggressive disinvestment programme.
Retail investors remain conspicuously absent from new equity issuances. The life insurance companies have, in effect, become the investor of last resort. They are the only institutions with enough firepower to stand up to sustained FII selling, bail out the corporate sector as we saw in 2009, or even support the government borrowing programme.
One can only hope that no legislative changes are made which seriously impact flows into these institutions.
A strong and credible policy document delivered by the finance minister is the need of the hour, it will seriously enthuse the investor base and potentially trigger strong capital inflows.
One can argue that India should not care about investors, especially foreign ones. The harsh reality, however, is that disinvestment seems to be (at the moment) the only credible plan the government has to bring down deficits, and without foreign investors, there will be no serious disinvestment.
Foreign capital providers will also be critical to ease the inevitable crowding out issues faced by the Indian private sector, as we try to simultaneously fund huge deficits and strong credit growth.
The world is searching for alternative growth engines, beyond the US and the OECD economies, and everyone wants to believe that India has a decade of 8-9 per cent GDP growth ahead of it.
The time has come to seize the opportunity and convince the investors that India and the UPA mean business.
Serious structural reform and a credible policy framework are needed to set the stage. Beyond the fiscal, one must also see policy movement on FDI and improvement in the capacity of the economy to absorb investment and accelerate supply-side response.
The upcoming Budget is a unique opportunity, we must not let it slip.
Source
Friday, February 12, 2010
Friday, July 31, 2009
Investing logic
The road to financial prudence is straightforward: invest systematically and don’t get carried away by emotions. Unfortunately, like many well-known rules, this one too is observed more in the breach. In fact, so influenced are investors by emotion and sentiment—of the general market kind as well as those sparked by social interaction—that investment decisions are usually dependent on emotion hotspots. But as investors have often found, it is at their own expense.
Now with the global financial crisis having dipped confidence levels to a new low, even a slew of stimuli has failed to lure edgy investors back to the stock markets in large numbers. In such circumstances, 50 Psychological Experiments for Investors reveals valuable insights into investor behaviour. A compilation of research exercises conducted across the world, the book deconstructs the effect of biases, interaction and emotion on investor activity. Using a question-answer format, author Mickäel Mangot draws conclusions from experiments conducted by researchers of behavioural finance. Even though the studies have been carried out mostly in western countries, the learnings are for everyone to pay heed to.
Beginning with momentum investing, the book highlights a number of fallacies in human behaviour. For instance, investors turn optimistic when the markets are bullish and become pessimistic in bear markets. If a particular asset class generates positive returns for some time, investors increase their exposure to it. This, says Mangot, is due to momentum bias. “Increases of 15% in real estate or of 30% in the stock market are extreme phenomena that are much less probable than more modest changes confirming to historical averages. Betting on them is like betting on snow in Beijing in October,” he notes.
He also points to a weekly survey conducted by the American Association of Individual Investors during 1987-1992 to understand how past performances determine investor expectations. The study found that investor expectations are more directly linked to the performance of the index in the week prior to the survey. Coming to an investment conclusion based on immediate past results, instead of more concrete historical data, can be less than fruitful.
Another behavioural aspect that is more applicable to current times is the disposition effect. Investors tend to keep loss-making securities for a longer period than the winning ones. The popular tactic is to book profits in winning stocks and hold the loss-making ones, a strategy that has proved expensive for retail investors.
A study of 6,380 investment accounts of individuals from 1987 to 1993 by Odean for the book Are Investors Reluctant to Realize their Losses? found that the investors tend to sell gaining stocks more than the losing ones. The study also found that the winning stocks which were sold, outperformed the market on an average by 2.3% in the following year, while the losing stocks which were retained, underperformed the market by 1.1%.
“Thus, if the investors studied had kept the securities sold and sold the securities kept, they would have increased their annual performance by 3.4%,” points out Mangot. The author calls this a “sunk cost fallacy”. This fallacy induces the investors to go right till the end, that is to keep the stock until it reaches the break-even point.
Another discovery is that psychologically, owning a home increases selfesteem and autonomy in investment decisions. Also, children of homeowners tend to be more successful than the children of renters.
The studies also track the gender difference in financial behaviour: women are found to be fiscally more prudent than men because of higher risk aversion. They also prefer bonds to stocks and change their portfolios less often compared with men.
Even the effect of the lunar cycle on human behaviour is dealt with, albeit in a realistic manner, by taking inferences from studies conducted during these periods.
While most of the results and outcomes cited in the book make for an interesting perusal, readers could get bogged down by the number of references for each question. But for the sheer width of psychological insight into investment behaviour patterns, this book is probably unmatched. It’s a very useful tool to introspect one’s investing history— and to correct the way i n which one makes investment decisions in the future.
BEHAVIOUR DECODED
How we choose information on fallacious criteria
Q. Why do you think you have to invest in the stock market when prices have skyrocketed?
A. Investors think that what’s occurred in the recent past can recur, but it is necessary to observe phenomena over a long period to get an accurate picture.
Q. Why do you buy stocks when the market has gone up, and bonds, when it goes down?
A. The better the recent performance of stocks, the more they attract investors. When the market goes down, investors turn pessimistic and invest in bonds.
How loss and regret aversions inhibit our behaviour
Q. Which stocks do you sell quickly and which are the ones that you retain?
A. The stocks that are gaining are sold more easily by investors than those that are losing. Studies show that the stocks sold subsequently outperformed the market, while those that were held, underperformed.
Q. Why do you reinvest in losing securities?
A. Investors put time, energy and money in investment decisions, so they try and average out the purchase price by buying more of a losing stock. All this increases the overall risk to the portfolio.
How purchasing real estate affects financial performance
Q. Do owners live more happily than renters?
A. Research shows that ownership of real estate produces satisfaction. Owners, therefore, enjoy better psychological health than renters.
Q. Are children of homeowners more successful than those of renters?
A. Studies show a positive impact of ownership on the present and future behaviour of children through geographic stability and a better living environment. They also tend to be more successful in school.
Source
Now with the global financial crisis having dipped confidence levels to a new low, even a slew of stimuli has failed to lure edgy investors back to the stock markets in large numbers. In such circumstances, 50 Psychological Experiments for Investors reveals valuable insights into investor behaviour. A compilation of research exercises conducted across the world, the book deconstructs the effect of biases, interaction and emotion on investor activity. Using a question-answer format, author Mickäel Mangot draws conclusions from experiments conducted by researchers of behavioural finance. Even though the studies have been carried out mostly in western countries, the learnings are for everyone to pay heed to.
Beginning with momentum investing, the book highlights a number of fallacies in human behaviour. For instance, investors turn optimistic when the markets are bullish and become pessimistic in bear markets. If a particular asset class generates positive returns for some time, investors increase their exposure to it. This, says Mangot, is due to momentum bias. “Increases of 15% in real estate or of 30% in the stock market are extreme phenomena that are much less probable than more modest changes confirming to historical averages. Betting on them is like betting on snow in Beijing in October,” he notes.
He also points to a weekly survey conducted by the American Association of Individual Investors during 1987-1992 to understand how past performances determine investor expectations. The study found that investor expectations are more directly linked to the performance of the index in the week prior to the survey. Coming to an investment conclusion based on immediate past results, instead of more concrete historical data, can be less than fruitful.
Another behavioural aspect that is more applicable to current times is the disposition effect. Investors tend to keep loss-making securities for a longer period than the winning ones. The popular tactic is to book profits in winning stocks and hold the loss-making ones, a strategy that has proved expensive for retail investors.
A study of 6,380 investment accounts of individuals from 1987 to 1993 by Odean for the book Are Investors Reluctant to Realize their Losses? found that the investors tend to sell gaining stocks more than the losing ones. The study also found that the winning stocks which were sold, outperformed the market on an average by 2.3% in the following year, while the losing stocks which were retained, underperformed the market by 1.1%.
“Thus, if the investors studied had kept the securities sold and sold the securities kept, they would have increased their annual performance by 3.4%,” points out Mangot. The author calls this a “sunk cost fallacy”. This fallacy induces the investors to go right till the end, that is to keep the stock until it reaches the break-even point.
Another discovery is that psychologically, owning a home increases selfesteem and autonomy in investment decisions. Also, children of homeowners tend to be more successful than the children of renters.
The studies also track the gender difference in financial behaviour: women are found to be fiscally more prudent than men because of higher risk aversion. They also prefer bonds to stocks and change their portfolios less often compared with men.
Even the effect of the lunar cycle on human behaviour is dealt with, albeit in a realistic manner, by taking inferences from studies conducted during these periods.
While most of the results and outcomes cited in the book make for an interesting perusal, readers could get bogged down by the number of references for each question. But for the sheer width of psychological insight into investment behaviour patterns, this book is probably unmatched. It’s a very useful tool to introspect one’s investing history— and to correct the way i n which one makes investment decisions in the future.
BEHAVIOUR DECODED
How we choose information on fallacious criteria
Q. Why do you think you have to invest in the stock market when prices have skyrocketed?
A. Investors think that what’s occurred in the recent past can recur, but it is necessary to observe phenomena over a long period to get an accurate picture.
Q. Why do you buy stocks when the market has gone up, and bonds, when it goes down?
A. The better the recent performance of stocks, the more they attract investors. When the market goes down, investors turn pessimistic and invest in bonds.
How loss and regret aversions inhibit our behaviour
Q. Which stocks do you sell quickly and which are the ones that you retain?
A. The stocks that are gaining are sold more easily by investors than those that are losing. Studies show that the stocks sold subsequently outperformed the market, while those that were held, underperformed.
Q. Why do you reinvest in losing securities?
A. Investors put time, energy and money in investment decisions, so they try and average out the purchase price by buying more of a losing stock. All this increases the overall risk to the portfolio.
How purchasing real estate affects financial performance
Q. Do owners live more happily than renters?
A. Research shows that ownership of real estate produces satisfaction. Owners, therefore, enjoy better psychological health than renters.
Q. Are children of homeowners more successful than those of renters?
A. Studies show a positive impact of ownership on the present and future behaviour of children through geographic stability and a better living environment. They also tend to be more successful in school.
Source
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