As the worldwide economy continues to wobble, investment markets remain under pressure and the European debt debacle is still some way from being resolved we thought it would be interesting to take a look at the investment opinions of expats in India. We are in very untraditional investment times and without looking at the figures you could be mistaken for assuming that some of the more obscure investment markets would become more popular. But is that the case?
Barclays International conducted a study recently looking at the surprising trend for investing in “treasure assets”. We will now take a look at investment trends more detail but before that we will take a look at the Indian economy and its current status.
Over the last decade or so India has become one of the economic powerhouses of the world and indeed many experts believe it has the potential to rise yet further up the league table of leading economies. This is an area of the world which is still showing significant growth despite the worldwide economic downturn and indeed demand for mining products continues to boom, a traditional reflection of a growing economy. But how is the underlying economy performing?
In years gone by inflation has been a major problem for the Indian government although thankfully it appears to more under control than ever before. We are also seeing major investment from overseas countries looking to tap into the Indian markets which are very much protected by the authorities. China and India are perhaps the only two major economies in the world which are showing anywhere near significant growth at this point in time and trading arrangements with overseas counterparts are being announced on a regular basis. But how does this leave the investment arena?
The property market is by far and away the most popular investment arena in the Indian expat sector at this moment in time. It is head and shoulders above any of the other major investment markets and perfectly illustrates the growing strength of the economy and demand for property. The property sector of any developing and developed economy will always be a major indicator of the underlying strength in the region and investor confidence. Whether investor confidence in the Indian property market has increased because of concerns about other overseas markets is a matter for debate but there is no doubt that demand is improving.
One factor which is mentioned time and time again with regards to India is the massive difference between those at the lower end of the income spectrum and those in the higher echelons. This is a problem which the Indian authorities will need to address at some point and coincidentally it is likely to lead to further interest in the Indian property market going forward.
There is also no doubt that overseas investment is flooding the Indian property market although how the authorities will regulate this investment boom remains to be seen.
Precious metals (7.81%)
The precious metals market tends to become something of a safe haven during difficult economic times, and the research study conducted by Barclays International has really reinforced this.
The ongoing situation within Europe has assisted the rise in precious metal prices. One example is the price of gold which was $300 an ounce back in 2000 years but has risen to $1600 an ounce today having peaked at $1800 in 2011. If you look back at the price of gold you can perfectly pinpoint economic crisis around the world because the price of this precious metal does peak during these difficult times. It is a reverse economic indicator and an interesting investment arena for those looking for a safe haven during difficult times.
While precious metals continue to push further ahead it is also interesting to see that demand for metals such as iron ore remains significantly high in India due to the ongoing economic expansion. This is perfectly reflected by the relationship between the Indian authorities, Indian businesses and Australian mining companies. Demand for the likes of iron ore has remained stubbornly high over the last couple of years with the Indian economy, and the Chinese economy, showing significant growth. It will be interesting to see whether the precious metals market does indeed turn around as and when worldwide stock markets recover although this scenario would appear to be some way off.
Fine wine (7.81%)
It is perhaps a surprise to see the fine wines investment market at number three in the list of popular investment arenas amongst Indian expats but this particular element of the online poll is very much skewed towards property at 62.50%. However, it is worth noting that the fine wines market has improved dramatically in size over the last few years and indeed investors from as far afield as Asia, Russia, South America, Europe and India are now very prominent in the marketplace.
This has tempted many people to move into the fine wines market, particularly with worldwide stock markets under pressure, although those investing with the intention of making a quick buck may need to think again. This is a very specialist arena and one in which you can seriously have your fingers burnt if you jump in without doing your homework. There are ways to invest in the fine wines market, via professional investors, without actually acquiring the fine wines themselves and the various associated costs. There are a number of investment funds in which you can buy units which can be readily traded therefore ensuring that your funds are not tied up for an undetermined amount of time.
Stocks and shares (6.25%)
It is a little disappointing to see the stock market so low down in the pecking order regarding investment opportunities in India but then again if we reflect upon the worldwide economy and the worldwide stock market perhaps it is not so surprising. There would seem to be significant scope for increasing interest in the Indian stock market amongst private investors which would potentially open up a lucrative investment opportunity for hundreds of millions of people in India.
However, at this point in time it does look as though investment in the property arena, in the eyes of many expats, is potentially far more lucrative in the short to medium term than a stock market investment. If the Indian economy continues to grow at the current rate, or above, it seems only a matter of time before interest in the Indian stock market will pick up. Local stock markets are not only an arena where shares can be exchanged and traded but they also offer vital finance routes for an array of companies. Quite why more investors in India are not prepared to tuck away Indian shares for potentially long-term appreciation is a little surprising.
While there are many experts who believe that the worldwide antiques market has increased in popularity in recent times due to the worldwide economic downturn, in some local markets this has yet to be reflected. However, the level of interest in the Indian antiques market is significantly higher than that in the worldwide antiques market which may reflect local culture and some unique investment opportunities we have seen in the Indian antiques market in years gone by. What kind of percentage of your investment portfolio should be directed towards the antiques market as a whole has been a matter of debate for many years because very often these investments can prove difficult to liquidate at acceptable prices if funds are required very quickly.
The antiques arena is just one of many specialist arenas which are catching the eye of investors who have lost faith with the worldwide and local stock markets. However, if you’re looking down this particular route it is vital you take professional financial advice every step of the way because it is a very diverse market which is very often at the beck and call of trends and fashions which can change very quickly.
The art investment market is fairly low down on the list of potential investment arenas for expats in India although we would hazard a guess to suggest that interest is probably higher than it was a decade ago. The Indian culture and the Indian way of life offers a number of very interesting opportunities and local artwork and local antiques are just two of those areas. The worldwide art market is believed be worth in excess of $100 billion per annum although 30% of investment funds are currently emanating from China.
While there is no reason to suggest that Chinese demand for worldwide artwork will reduce in the short to medium term it is very dangerous to depend on one group of investors to inject so much capital into one sector. If Chinese investors were to pull out or reduce their investment then this would have a material impact upon prices, probably more so towards the top end of the market. Again, if you’re looking to invest in the art market you need to ensure you have done your research, you are taking professional advice and you know all the pros and cons of investing in art.
Classic cars (3.13%)
As we mentioned above, the Indian economy is still very much growing and very much developing therefore areas such as the classic cars investment arena are significantly underdeveloped compared to their overseas counterparts. That is not to say that the classic cars arena will not attract more interest in the medium to longer term but it does appear it is something of an afterthought for many investors at this moment in time. This is despite the fact that we see regular classic cars sold for millions of dollars to investors around the world despite the ongoing doom and gloom.
It is also worth pointing out that the classic cars market, where many of the products are valued on their rarity value alone, is a very specialist arena. You need to do your homework, you need to take advice and you need to be fully aware that your investment may not be as liquid as it may be in an area such as worldwide stock markets. It seems as though the vast majority of classic car investors make their returns on a longer term basis, spotting trends and fashions, and having the ability to leave funds invested for many years.
Risk reward ratio
Whichever investment market you are looking to there will be a risk reward ratio attached which reflects the underlying confidence of investors and the potential for the future. In simple terms when you look at any investment you should have in your mind the potential reward and the potential risk associated with this reward. This will then give you your risk reward ratio and allow you to consider whether the risk associated with any one investment is worth the potential reward. It all sounds very simple but there are a number of issues to take into consideration!
There are two main types of risk which are systematic risk, associated with general markets and general investment arenas, and specific risk which is a risk associated with a specific investment. You need to consider these two risks together when looking at any potential returns and calculating your own risk reward ratio. In simple terms, in times of economic trouble we will see the potential risk increase and therefore investors will require a potentially high reward to take on this increased risk.
A perfect example of the risk reward ratio impacting markets was the money markets in the aftermath of the 2008 mortgage crisis in America. As investment institutions across America began to feel the cold wind blowing through the money markets we saw those looking to lend money increase their required rate of return because of the perceived increase in the risks associated with individual third parties defaulting on their liabilities. This has also been very evident in recent times within the European money markets where just lately we saw Spanish sovereign debt attracting an interest rate of 7%. This effectively brought about the change in the strategy of European Union leaders to tackle the European debt crisis.
In simple terms investors in the money markets were demanding a higher rate of return from the Spanish government because of the higher risk of default with many believing the Spanish government was on the verge of collapse.
Even though the general worldwide economy is continuing to struggle and indeed many experts believe it may be decades before the European debt debacle can be flushed through the worldwide financial system, there are still some stark contrasts in local economy performance. On one hand we have the European economy which has turned down into a double dip recession while we have China and India which continue to show significant economic growth and influence on the worldwide stage.
Despite the fact that China and India continue to grow there is no way this can continue for the foreseeable future unless the worldwide economy is stabilised and recovers. In years gone by, during economic downturns all focus has been upon the US economy which has very much been the engine room of the worldwide economy. However, over the last couple of years we have seen more and more focus upon the European situation which has the potential, if left unattended, to precipitate credit crunch part two and the immense damage this will do to economies around the world.
We can only hope that European leaders are able to put together a suitable debt relief package which will allow governments to operate without having to pay in excess of 7% interest on sovereign debt. There have been signs that the German Chancellor, who is effectively dictating the situation at the moment, has softened her stance regarding direct European funding of local banking systems (a vital element of the overall recovery program) but time will tell.
It will come as no surprise to those who have covered the Indian investment market, and indeed the Indian economy, to see that a massive 62.50% of the vote was in favour of the property market. The property sector is a vital element of any economy going forward and one such as the Indian economy, which is still developing, has the potential to become very influential in the future. As a consequence expat investors seem happy to invest in the longer term within the Indian property market and hopefully piggyback the ongoing economic growth in the region.
The other investment arenas which we covered are literally miles behind the property sector and it was interesting to see that stocks and shares received only 6.25% of the vote when many people believe these are the gangplank of any developed and developing economy. It is highly likely that we will see more interest in stocks and shares within the Indian expat community once the Indian stock market is expanded, modernised and private investors in the region are educated on the potential benefits of long-term investment.
A number of experts have pinpointed India as a potential economic powerhouse of the future and it is not difficult to see why when you consider the economic growth today compared to the overall worldwide economic downturn.