What I read this week: Should you reduce your equity exposure? Why govt will borrow less via bonds

If you are in your 20s and 30s, should you reduce the equity exposure with correction in equity markets and expensive valuations?

Sweden is the world's most cashless society. It is having second thoughts about going 'fully' cashless as the public support is beginning to waver. Has Europe's war on cash reached the limits of its practicability?

Is the surge in global growth over? Lakshman Achuthan, co-founder of the Economic Cycle Research Institute (ECRI) has recently indicated that the growth rates of ECRI's leading indicators have turned down and the global growth upturn could be over.

The government recently announced its 1HFY19 borrowing calendar that surprised the market positively and led to sharp gains in the bond markets. Will this be short lived?

I reiterate that this is only a sampling of some of the best content I read through the week, with a dash of my own thoughts. Until next week…

Dude, shall I cut my equity exposure?
With the equity markets correcting and valuations getting expensive should you reduce the equity exposure? Markets are slightly expensive and the global interest rate scene is extremely uncomfortable.

Let's take an example of what happened in May 2013, when the US Fed announced plans to gradually reverse the quantitative easing (QE) programme. The Indian equity market was down by 10 per cent and the rupee had moved from 53 to 66 levels. India was classified as fragile 5. What happened next? The markets recovered. If you sold the stocks in panic at lower prices, it could be possible that you would have entered at a higher price later. If you are still in your 20s and 30s you have a lot more years of earnings and savings to be invested. Let's understand this through the concept of human capital vs financial capital.

Human capital is simply the amount of money you are yet to earn using skills, knowledge and experience, over the course of the rest of your lives. The more skills/knowledge/experience you have, the higher your human capital is. In Indian context, assuming most of us retire at around 60 to 65, human capital is what we are yet to earn till we are 60 to 65. So our human capital is at the maximum when we start working and diminishes as we near our retirement.

Financial capital is the sum of all of your assets minus your debts - i.e your net worth. Financial capital is the inverse of human capital where usually, it's lower when you're younger and gradually grows till you reach retirement.

To sum up, if you are in your 20s and 30s, a long investment time horizon & large human capital are the biggest advantage you have. To take advantage of this, you could go for an equity heavy portfolio (assuming you have your short term requirements sorted through safer avenues such as fixed income funds, FD etc).

A high equity allocation also comes with the caveat that you must be mentally prepared for a 50 per cent correction once in 5-7 years, 25-30 per cent correction once every 3 years and 10 per cent per cent correction every year (all these are rough estimates and not cast in stone).

Your portfolios might look risky because of high equity exposure, however, if you take into account the potential future portfolio size, the current portfolio will usually be minuscule in the context of future portfolio size. So even if your investment capital falls by 50 per cent, if you frame it as a percentage of your total expected future portfolio, the fall would only be a few percentage points because you still have another 20-30 years of human capital left.

In the initial stages of investing, focus on things under your control - career & earnings, spending & savings pattern, regular investing and hanging on to the portfolio (not getting knocked off by intermittent scary declines). During initial stages of wealth building, don't complicate life by getting into the nuances of market timing, asset allocation calls etc (which you will save for another day when your investment portfolio has grown reasonably large). Try and automate your savings & investing habits to large extent - keeping decisions to the minimum.
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Even the World's Most Cashless Nation Doesn't Want to Go Fully Cashless
Sweden earned a reputation as the world's "most cashless nation" in 2017 as the amount of cash in circulation dropped significantly. However, the public support is beginning to waver about going completely cashless. In a recent survey, an overwhelming 68 per cent of the respondents stated that they would not like to live in a fully cashless society. Opinions differed markedly between age groups but in no single demographic was there a majority in favor of abolishing physical currency. Among the 18-29 year old respondents, 56 per cent declared that they still want to keep cash while 38 per cent said they would welcome a cashless society. Among the survey's oldest demographic, the 65-year-olds, 85 per cent wanted to keep cash.

Most of the country's bank branches have stopped handling cash altogether and many shops and restaurants now only accept plastic or mobile payments. As a result, many people who struggle to navigate the digital system, or who don't have credit cards, in particular the elderly, are finding themselves increasingly locked out of the country's payment system. Sweden's parliament has launched a review on the impact of going cashless too quickly after fears that it dramatically excludes the financial needs of the elderly, children and tourists who rely on cash.

A committee of Sweden's central bank, the Riksbank, hopes to publish a report on the expected outcomes of a cashless Sweden by summer 2018. The Riksbank governor, Stefan Ingves indicated that Sweden's national electronic currency would not replace physical cash altogether as that would create a problem in times of crisis. If the power supply is cut, it's no longer possible to make electronic payments. It's yet another sign that perhaps Europe's war on cash has reached the limits of its practicability - at least for now! Apparently, even the people of the world's "most cashless nation" don't want to go fully cashless. And most incredibly, the leader of its central bank appears to agree with them. Read More

ECRI's Lakshman Achuthan: Our Long-Leading Index Has Turned Down
Lakshman Achuthan, co-founder of the Economic Cycle Research Institute (ECRI), had indicated in early 2017 that sustained global expansion was underway based on the ECRI's long leading index that had turned higher. Indeed, 2017 was one of the strongest synchronized upturns in many years with global markets also seeing record returns in response. His call was correct. This time, he has indicated that the growth rates of ECRI's long leading indicators have turned down. That tells us the story that synchronized global growth upturn that we've all been enjoying last year is drawing to a close and in fact may already be over. He anticipates roughly a 2 per cent slowdown, which is not necessarily recessionary unless something else deteriorates in the leading indicator. ECRI's approach is to look at a large array of leading indexes, with each index being a composite of a handful of good leading indicators of the current cycle.

Last year, we had inflation cycle upturns still intact and a growth rate cycle upturn that was the best for the global outlook since 2010. But if we have a growth rate cycle downturn taking hold and an inflation cycle, at least in the US, not running away, it's a little bit of a different story to be raising rates. It is to be seen how that evolves. Read More

The Govt Will Borrow Lesser from Bonds Because We Still Love To Do PPF
The 1HFY19 government borrowing calendar surprised the market positively with its quantum, tenure and nature of the borrowing. The government announced that its borrowings in the first half of the next financial year will be lower by 23 per cent year-on-year at Rs 2.88 trillion.

The government's borrowings for the FY2019 are expected to be at Rs. 6.06 trillion. The government intends to use larger inflows from National Small Savings Fund to fund its fiscal deficit during the year easing the pressure on the bond market that has witnessed a spurt in yield in recent months. Lower borrowing in the next six months, opening up for foreign buyers and using floating rate bonds might actually soothe market expectations.

The government borrowings have usually been front-end loaded with about 60-65 per cent in the previous years; however, this time it is at 48 per cent, which is surprising. Bond prices have fallen 2-3 per cent in the last three months and have had a huge impact on bank bottom lines.
A respite will help them, even if it's temporary. As we are close to the fiscal year end March, a lower yield - meaning a higher bond price - will help all banks report better numbers. In banking terms, that means the situation is going to change from horrible, to slightly less horrible. Read More