Tuesday, July 19, 2016

Status note on the Rupee

Is the Rupee over-valued? I have tried to capture the relative real effective exchange rate (REER) trends of Indian Rupee against those of its emerging market peers.

The graphic (data from Breugel) presents the REER of 14 major emerging economies, including two of India's neighbours, since 2007. As on September 2008, with the base year of 2007, the Indian currency was the weakest in the sample. Fast forward to March 2016, and the rupee has appreciated more than all but four currencies, rising steadily by 16% since January 2007. It was largely stable during the peak of the crisis, but declined in mid-2013 as the taper tantrum played out. However, since the September 2013 trough, the rupee has steadily appreciated by more than a fifth, making its real appreciation significant.
Apart from China, among its peers, only Bangladesh, Vietnam, and Pakistan have had greater currency appreciation since 2007. Since the taper tantrum trough, only Bangladesh and Pakistan currencies have appreciated more. The Bangladeshi Taka has appreciated by nearly 54% and Vietnamese Dong by nearly 44% since January 2007. Interestingly, but for the 2009-10 blip, Bangladesh and Vietnam have been growing steadily upwards of 5-6% for some time now. Pakistan, growing at 3-4%, clearly has a currency over-valuation problem. 

Since September 2013, India's central bank has waged a very firm battle against inflation and has been largely successful in anchoring inflationary expectations. In the process, it has not only managed to provide macroeconomic stability but also enhanced the perception among investors. The problems elsewhere coupled with the country's relatively strong economic growth has only added to the positive animal spirits. In this "country world of the blind", the Rupee has naturally held strong against its counterparts in East Asia and elsewhere.

In other words, this strength of Rupee is a natural consequence of good macroeconomic policies, relatively high growth, boosted by the Central Bank's credibility, and amplified by economic weakness elsewhere. The RBI could not have engineered such persistent currency strength through open market operations in such choppy times. But its corollary has been erosion in trade competitiveness relative to its competitors, several of whom have benefited from significant depreciation.

It also underscores the point that a simultaneous pursuit of macroeconomic stability, high growth and depreciating currency may not have been possible in such times. In fact, may not be possible during most times in a closely inter-connected global economy.

China debt fact of the day

China debt fact of the day

From a Bloomberg article on China's fascination with high speed rail, whose network has grown to nearly 12000 miles in just under a decade,
In May, state-owned China Railway Corporation, the operator of China's rail network, reported that its debt had grown 10.4 percent in the past year and now exceeded $600 billion; in 2014, roughly two-thirds of that debt was related to high-speed rail construction. That’s more than the total public debt of Greece. The company runs only one profitable line -- the massively traveled Beijing-Shanghai corridor.
That is a staggering number. The debt of just China Railway Corporation is 30% of India's GDP! 

Principle of wealth building 1 of 5

The first principle of wealth building is there are only three paths to choose from in this journey... 
  1. Paper assets (stocks, bonds, etc.)
  2. Investment real estate (not your home) 
  3. Owning your own business 
Your wealth plan should include at least two of the three paths and occasionally will include all three (depending on personal circumstances). This increases safety and certainty in the outcome. 
Surprisingly, paper assets are rarely a wealth building vehicle despite the avalanche of media propaganda leading you to believe otherwise. They are typically a parking place for preserving and growing the purchasing power of wealth earned elsewhere. 
The reason this is true is because of strict mathematical limitations to paper asset growth. It is the only asset class out of the three that is governed by these limitations. 
(Side note: Did you notice the irony that paper assets are not really a wealth building vehicle when that is the only thing included in a traditional adviser's financial plan? That may not make sense until you realize that financial advisers are in the business of helping you manage the wealth you already created. They are not in the business of helping you build wealth in the first place.) 
In other words, there are really two steps to the wealth process (but most people only think in terms of one). The first step is to create wealth and the second step is preserve and grow that wealth through investing. 
So how do most people create wealth in the first place? 
Statistically, the answer is real estate and owning your own business. Why this is true will be explained in wealth plan principles 3 and 4 over the next few weeks. These reasons are an important part of your plan. 
A small proportion of the population can save their way to wealth by applying frugality and deferring earned income (wealth earned elsewhere) to wealth vehicles 1 & 2 (real estate and paper assets). 
However, saving your way to wealth is less common because it ignores wealth plan principles 3 & 4 and because it requires discipline, persistence and starting early enough in life to allow compound growth to work its magic. Yes, it is a workable strategy, but not many people fit this profile. 
Your homework from this lesson is to start thinking about which of the three paths to wealth you would like to include in your wealth plan. 
In your next lesson I will explain how to match the various paths to wealth with your unique life situation to begin formulating your personalised wealth plan. This is critically important to actually reaching your goal. 
There are many ways to achieve wealth, but only one path that will uniquely fit you. I will explain how that works in your next lesson. 
Finally, if you're liking this series, consider taking it to the next level with my course on designing your wealth plan. In Module 2 - Lesson 4 of that course I show you exactly how mathematical limitations to asset growth get integrated into your wealth plan design, and I provide the necessary resources showing you realistic rates of growth for each of the assets in your plan. Also, in Module 4 of the course, I explain the principles underlying each of the 3 asset classes so that you know how to properly utilize each asset class in your wealth plan.  
Okay, see you in a few days with your next lesson from this course... which will be wealth plan principle #2 of 5. 
See you then...

Ritesh.Sheth CWM®

              Helping you invest better...  

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