December 11, 2019
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The Financial History Of 2004

Retail loans, realty led the floor, while funds-linked services too came of age

The Financial History Of 2004
Waiting to usher in 2005, you might view 2004 as a year of significant change, of new opportunities and threats and also, a year of significant volatility in the financial markets. A year that marked a change in investor mindset as they learnt gradually to deal with risk and uncertainty. A period when they realised a little knowledge can be dangerous and entrusting money to wealth/fund managers and financial planners was prudent if you couldn't keep pace with the changing times. So what changed?

Inflation and interest rates. The year started with global oil prices firming up to over $31 a barrel as OPEC decided to curtail supplies even as US inventories were low. Despite a dip in demand post-winter, oil prices didn't recede to anywhere near the benchmark $25 a barrel. This, along with rising commodity prices, spelt the bottoming out of inflation in India and a further up-tick in US prices.

While early indications pointed to a softening of interest rates, inflationary pressures and banks' cost of funds kept this in check. Ample liquidity and few options for deployment, given the low bond yields and preference of large corporates to tap overseas markets for funds, led to the retail focus gathering momentum. Intensified competition in the segment prevented interest rates on retail loans for housing and cars from firming up. What this meant, though, was that investors had few choices for inflation-beating fixed-income returns other than small savings and goi savings bonds. Debt funds, meanwhile, acquired a higher risk profile with uncertainty in the interest rate trend.

After a robust over 8 per cent GDP growth, fuelled largely by an over 10 per cent growth in agriculture in 2003-04, the rising trend faltered. But this was to be expected—over the past 8-10 years, a good agricultural year was invariably followed by a bad year—as it was too much to expect a repeat growth performance from the agri-sector. Thus, despite robust growth in industry and services, overall economic growth dipped.

However, sentiment was upbeat. Japan was riding the China boom, US was perking up and a spate of trade agreements between countries in Asia (and with Latin America) and the expected dismantling of trade barriers threw up new opportunities and, of course, new threats for business. Companies had to deal with rising raw material costs and while some were able to pass these on to customers, others had to absorb the increases. Interest charge gains had largely played out and core business was what was driving bottomlines.

Exports remained the driver for growth in auto, steel, pharma, engineering and IT and ITES sectors. This was quite like 2003 when, for instance, in the steel sector, 1 million tonnes of additional exports (a 36 per cent increase) was twice the increase in domestic consumption (0.5 million tonnes) in the April-November period, despite the infrastructure initiatives. China though remained the driver for commodities, whose prices remained volatile with hedge fund interest after scaling new highs.

Foreign portfolio allocations to emerging markets and India swelled. The focus shifted from undervaluation (the investment theme of 2003) to sustainable growth and global competitiveness. Urged by the finance minister early in the year, more companies ventured abroad for business and to acquire foreign companies, making acquisitions another driver of stocks.

2004 also saw the entry of pension funds with defined contributions and market-linked returns leading to yet another assured-return investment option being relegated to the history books. Commodities markets opened up a new avenue for investment and mutual funds looked to join the club—seeking approvals to invest through existing sector funds and new products like inflation plus funds (benchmarked to a commodity basket with a kicker for inflation-beating returns).

The real estate market too saw heightened activity. If 2002 was the year for debt and 2003 for equity, 2004 could well be called the year of realty. Capital values rose in the residential segment as home-buyers flocked to lap up houses on cheap credit at prices inflated by brokers and speculators (despite adequate supply). The launch of real estate mutual funds (RITES) also received a final nod.

The other big move in 2004 was the freeing of overseas remittance by individuals for up to $25,000 a year. This meant anyone could now invest in forex deposits, and stocks and bonds in overseas markets. Banks launched deposit products, brokerages geared up to provide access to other markets and MFs floated schemes to invest in foreign securities. Investors realised, though, that exchange rate volatility could eat into returns.

Thus, 2004 was a year of significant change in the investment landscape—in terms of products, markets and risks. Product complexities, rapid globalisation, overseas investment opportunities and volatility all led to the need for greater research and analysis. Investors seized of this increasingly sought expert counsel or opted for the MF route. It's a healthy trend and should gather momentum in 2005, especially since most retail investors lack the time, information and skills to manage their money.
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