January 1, 2007

A new Era

I have been noticing in the past few weeks that interest rates have started hardening. I do not have the exact figures, but it seems that the rates for housing loans have started approaching double digits now.

I wrote a post on interest rates a year back (see here). Back in 2003-2004 the rates were at an all time low (as low as 7.5% fixed and 7.25 % variable). However everyone looking at the immediate past, were prediciting further drops (what else would explain almost everyone’s preference for variable rate loans?). I almost got into an argument with the loan officer in getting a fixed rate loan (the loan officer kept telling me that I was making a big mistake).

My logic in working out a rough pricing level for loans was detailed here. General extremes in valuations, whether stock or interest rates are easier to spot (although I cannot predict them). However I do not know if the rates are high now, will rise or fall in the future. What I feel strongly is that any rate lower than 8% is good and should be locked in via a fixed rate loan.

There are a few new conventional ideas now prevalent such as

- real estate is great investment at any price and will rise 20-30 % per annum due to the extreme shortage of real estate in india (for better idea of real estate bubbles, read about the 90’s real estate bubble in japan)
- Indian economy has entered a new era and stocks are worth more now. Every drop in the market as a result presents a new opportunity to buy

I don’t claim that I know any better on the above two new convential ideas in vogue currently. I am however unwilling to pay for the bright and shiny new future in these investment classes (stocks and real estate)

4 comments:

Prem Sagar said...

Hi Rohit,
With every rise there comes concern! Yes, but what if its a multi yr bull run? No one can say for sure!
Even today, less than 4% of savings money enters the stock mkt! That means more ppl burnt their hands rather than made money!!
With all asset classes at multi yr highs, would u think sitting on cash is good?
the issue is making money wont be as easy as it was in 2003-06. if ppl distinguish between a bull mkt and brain, and have reasonable expectations, dont u think equities are much better off than any other asset class, given the other alternative of staying in cash?
As far as I have seen, MOST of the retail investors had missed the bull rally in stocks, real estate, gold, art,etc....even in bull rallies of 2005, 06 I knew a lot of ppl who lost money in the 2006 May fall and 2005 Mar fall when they got scared and pulled out..
As far as I am concerned, the bull run has not even scratched Indian retail investors!! Only a few ppl out of our huge population managed to make money out of stocks!
there should be a time when those ppl waiting on the shores lose patience and jump in...and maybe that is the time a bust will happen!!
Who knows!!!

Anyways, heres wishing u a fantastic bull run for ur stocks!!!

Rohit said...

hi prem
i dont agree with the way you have framed your analysis. i have also heard that only about 4-5 % of the retail money has enetered the market. however you would agree that this % does not decide if the market is over priced or not.
i dont mean to say that the market is overvalued and one should stay away. no such sweeping statements.
what i however think is that there no low hanging fruits and one should be careful in identifying and investing in specific stocks.

realestate is a different story altogether

wish you too a great return on your portfolio for this year

Amit said...

Hey Rohit,

I partly addressed the issue of whether the Indian economy (and by extension the stock and real estate markets) is a bubble yet and, based on some research, believe it has some way higher to go. Do check out the post on my blog and leave your comments.

In general FIIs too are rasing money for further real estate investment in India so I believe there is scope for further appreciation, though the bulk of it will be in suburbs and the class B and C towns which are where most of the investment will go.

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