Back in September, Profit Watch rammed its stake in the ground and flew its tattered warning flag. We crowed: Avoid India!
We spoke in the financial sense only. By all means, take a holiday there. But invest your money? Don’t make me laugh.
This might seem a touch obscure if you’re Australian.
But recently, an Indian ETF launched on the ASX to give investors ‘exposure’ to the Indian growth story.
It might sound reasonable at first glance. Except the whole thing is cactus, for the moment…
India’s banking system looks decidedly ropey. It also looks like it’s going to get worse before it gets better.
Reuters reports1 that a slump in the residential property market over there could leave many builders struggling to repay their financiers.
The whole modern economy, no matter where you are, is built around the interplay between land values and the credit creation of the banking system.
When property is rising and credit expands, the economy gets along just fine, mostly.
But when these go bad, there’s only one thing to do: get your money out and wait for the washout!
India’s property cycle goes from bad to worse
The number of Indian property developers going into bankruptcy has doubled in the last nine months.
One analyst calls this a triple whammy for India’s main banks.
Here’s why: Some of them have lent to ‘shadow banks’ that, in turn, lent to property developers.
The banks may have financed construction loans, too. Then they have exposure to homebuyers who may be hit from this whole mess.
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The consequence of all this is predictable. India’s banks will start hoarding cash and pull further lending while they deal with the fallout.
They’ll be forced to write off a lot of bad debts. This will shrink credit to the real economy.
Most likely, the Reserve Bank of India will step in at some point with a bailout or two.
They already have the embarrassment of Indian depositors lining up to pull their money out of some banks.
Half a million jobs could be at risk here.
Reuters sums it up…
‘Several industry sources said builders were struggling to offload properties, even though they are ready to offer buyers up to 25% discounts on listed rates.
‘The situation now is so severe that real estate inventories across India are at an all-time high of nearly four years and property prices have not risen in most parts of the country in the last 4-5 years.’
This is a very good example of how knowledge of real estate can help you make your share market decisions.
The two asset classes are not mutually exclusive. One influences the other.
But it’s property that holds the trump cards. Why?
It’s the biggest asset class in most countries. Property collateralises most bank lending. Middle class wealth is built around housing.
That means the share market is always hostage to the health of real estate. 2008 was a perfect example of this.
When real estate goes bad in a big way, the economy is toast.
That’s India’s lot for the moment. There’s little to get excited about on that front.
The ASX: a stock picker’s market
Mind you, we could probably say the same thing about a lot of things lately.
The recent trade war relief rally in the US lasted for one day.
We’ve been here too many times before for investors to buy into the last ‘resolution’.
Mr Market doesn’t know whether to go up or down.
That doesn’t mean you can’t get a trade or two away in today’s market. But relying on the main index to lift is no way to make a buck currently.
What to do? There isn’t much choice except to knuckle down and dig around individual stock ideas. That’s no bad thing, either.
There are heaps of stocks on the ASX you’ll never hear about unless you start doing some searching beyond the top 100.
These are often way more exciting, too. The potential returns are juicy. Now is an opportune time to be looking.
A lot of stocks in the small-cap sector, for example, are releasing their quarterly reports.
This is how they update the market on their recent progress — or otherwise.
You can surf these announcements at times…
I sent around a trade idea last week for a stock called Splitit Ltd [ASX: SPT].
It jumped 15% yesterday after announcing some great results out of North America.
The news is out on this one for now, so we’ll see if it can hold the gain from here.
But moves like this — and even better — happen a lot. That’s just a small example. Point being: You’ll only see these if you’re looking for them in the first place.