गम हो के ख़ुशी दोनों, कुछ देर के साथी है |
फिर रस्ता ही रस्ता है, हसना है न रोना है ||
दुनिया जिसे कहते है, जादू का खिलौना है |
मील जाये तो मिटटी है, खो जाये तो सोना है ||
As deep and deeper, I think about 2013, I firmly believe that it is going to be a stormy year for market. Broadly, 2013 will have forces working on both the sides. Some sectors after 3-4 years downturn and adjustments will make the bottom and start rising. While some sectors having scaled newer highs in 2012-13, will start adjusting with rising living cost, fuel cost, lower profit margins and most important of it slowing consumption demand.
I advise to reduce equity exposures to 50% or may be less than to that, may be 25%. Investor can choose to invest in Long term G-sec funds. I expect RBI to reduce interest rate further from current 7.75% to 6%. That can roughly translate in 15-17.5% returns in next 1-1.5 years.
I also advise not to buy Fresh Gold here. Gold’s recent movement indicates that Deflation is on the horizon not inflation for some time. You will also read in detail that World is sinking back into recession with GDP’s dropping drastically in last few quarters and gargantuan money printed so far are still lying on bank’s balance sheet, has not made a way to consumer which would have otherwise created inflation in system. With continued deleveraging, Gold can correct further down below $1550 to $ 1400 and may be lower. Support of $1550 is crucial to watch.
Let us check in details,
Whether current fundamentals of India and World can sustain the recovery?
Is world really growing out of problems or sinking deep again?
What justifies the current valuation of world indices?
What to expect from 2013?
Let us start with recent policy reforms declared by Finance Minister P. Chidambaram
Pro reform policies
has been factored in market, returning in excess of 20%, since P. Chidambaram took charge of Finance Ministry. So, what matters now is, Can FM implement what he promised? Can he present credible budget, which addresses growth concerns but keeps deficits in check? Can he expedite decision making and policy execution in bureaucracy? Market will now wait to see FM executing framed policies.
Indeed, steps taken by FM are very courageous and has capabilities to stimulate growth, but in long term. Govt has not received single proposal after much hyped FDI in retail bill passed in lower house. What is very important and unanimously industrialists demanding is not big bang reforms. They demand that Govt just functions. Govt keeps bureaucracy in check and get work done from them.
Some time ago, Ratan Tata publicly said that Govt could not clear his power project file for 3 years. Before retiring Mr. Tata said about present Govt policies and working styles in interview with Financial Times, which I do not hope will change in short time as Govt is not sincere about it
“You may have the prime minister’s office saying one thing and maybe one of the ministers having a different view. That doesn’t happen in most countries,”
Tata said different agencies in the government had almost contradictory interpretations of the law or interpretations of what should be done. “These are things which, by and large, would drive investors away in most countries,”
In such a context, Tata said, companies and groups like his own were tempted to look away from home and around the world for growth opportunities. “You start looking for geographies where you can make a difference,” he noted.
Tata said the government’s inability to make decisions made it difficult to grow some of the group’s largest domestic businesses, which include Tata Steel and Tata Power.
In above statements, Honourable Ratan Tata is not complaining about Pro Reform policies not in place or Govt did not subsidize some raw materials or Govt not imposed import tariff to protect domestic businesses.
He is just pointing at Governance Deficit.
Yes, I acknowledge Mr. Chidambaram’s efforts, he was appraised for his work in past and also about his work in Home Ministry before joining FM back. Mr. FM will put hard efforts to frame pro growth and pro reform policies but it will take time to percolate in real economy, may be 6 more months or 1 year.
Bottomed out GDP
Post 1992, it seems our GDP Growth rate has broadly remained above 5% or has not dipped much below 5%. Recent GDP data out for the quarter of July-Sep come at 5.3%. Pre crisis, GDP rate had reached to >9% and remained there for few quarters then dipped to 5.8% towards 1st – 2nd quarters of 2009. It again went back to 9% in 2nd to 4th quarters of 2010 but then it has continued to fall incessantly.
On one side, it looks like that it can bottom out but if Housing prices correct from record highs, if higher diesel prices induce inflation yet again, chances of dip below 5% cannot be denied. That will definitely punish stock market hard.
RBI Reducing Rates
RBI was under severe pressure to reduce rates. But, RBI has gained appreciation from all quarters of academics and industries to prioritize inflation containment over promoting growth for good long term health of Indian Economy. Recently, RBI reduced rate further from 8% to 7.75% and I expect it to continue to reduce to 6%. But, inflation still remains a concern for RBI’s policy, further. Even after slowdown, even after 2 negative quarters of GDP growth in UK, severe slow down and high unemployment rate in Europe and slowed US economy commodity prices and specially Crude Oil has not softened to the comfort level of RBI.
Govt has already declared to decontrol the diesel prices and OMCs will increase half a rupee every month that can provoke inflation again. And, if we see recovery in Europe and US gaining momentum, it poses a threat to our trade deficit and in turn inflationary scenario resulting RBI’s pause to rate reduction.
Therefore, though RBI has declared its intention to prioritize growth in coming policy meetings but conditioned to inflation stays contained.
World Economies Experiencing Mild Recovery
From the trough of 2008-09, major world economies recovered till middle of 2012. US GDP growth rate declined from peak of 2.5% to -4.6% towards middle of 2009 and got back to 2.6% in 3rd quarter of 2012. But, last quarter GDP has slipped to 1.5% raising fresh concerns. IF it falls in 1st quarter of 2013 below 1.5%, it can slip well below X-axis to negative zone.
Germany grew at above 3.5% in 2007, declined to -6.8% during crisis period and bounced back to 4.7% in 2011. But, from there it has continued to slip and last quarter GDP growth came at just 0.4% lowest since 2007. It, too, can slip below X-axis. Growth rate for France came at 0.15% and -0.5% for United Kingdom. In nut shell, Europe has started degrowing and hence the much hyped economic recovery stories are befooling investors.
Emerging nations economies did recover well in 2011-12 but are facing strong headwinds from lower demand from west, higher inflation at home and very high currency volatility.
China’s double digit GDP growth rate in 2007-08 had slipped then in single digit and except 3 quarters in 2010, it has remained in single digit. Recent data showed a mild uptick. China’s GDP grew at 7.9% vs 7.4% of previous quarter. Yes, silver lining… India has slipped to 5.3% from high of 9.4%.
Indonesia and Philippines are true exception, their growth rates scaled up to pre crisis levels in 2010 and since then remained there.
It should be noted that among major Asian emerging nation, INDIA has fallen quite more compared to peers. It glorifies the Governance deficit of last 5 years.
A day before, IMF said that India’s de growth is attributed to domestic factors. Foreign factors has less to affect growth to the extent it got reflected in recent statements by Govt.
Japan slipped to 0.5% from 3.9% growth rate in 2012. South Korea fell from as high as 8.7% registered in 2010 to just 1.5% in last quarter.
I believe, you have understood the broad picture. The main stream media is not highlighting that except some Asian nations, whole world is slipping into red again as they did collectively in 2008. If you put together Europe, UK, US, Japan, South Korea and India, they will account for atleast more than 60-70% of world GDP and these nations GDP growth is on continuous decline.
It poses a grave picture for 2013. I again reiterate do not remain heavily invested in stocks.
World Markets Scaling Newer Highs
Dow Jones reached back to the level of 2007 high, DAX was only few points away few days back from 2007 pinnacle, FTSE is just 5% away from peak seen in 2007, India, too, crossed many important resistance and Nifty was just 4% away to reach to 2007-08 high.
It certainly presents a question – will this rally survive? Why this rally survived in spite of fall in GDP?
Comparing present scenario with 2007 looks quite similar. I observe a decline in GDP growth rate before markets dropped. But, markets behave differently. Markets continued to go up though GDP was falling in the expectation that with intervention of Central Banks and Governments, GDP will improve. Not only that, there were many embedded and collected problems. Since, dot com bubble, world Govts have not tried to solve the basic problems. They always chose to opt for temporary solutions by cranking money printing presses to kick the can down further. But, accumulated problems of last 13 years will get heavier on temporary solutions. And, it is apparently clear from statistics presented by different experts that it take now $7 to produce $1 GDP for US. How long economies could be run on debts? A day is very near, when choice would be none, but to bite the bullet. In spite of all sorts of efforts by Central Banks and Govts, crashing GDP rates states that consumer and corporations are deleveraging. Neither they are ready to consume at the level of pre crisis nor they are ready to bet on risky assets in the pursuit of speculative profits. They just want to save more for rainy days. 2008 has taught hard lesson to them. Now, is the turn of Govt!!
Falling GDP, gargantuan debts, low consumption, very high budget deficits, high unemployment rates – all combined depicts dreary picture for US economy.
European problems have not been solved. They have just bought time by agreeing Germany to keep bank account open to bail out bankrupt nations. But, now Germany’s debts are also widening. Germany’s debt to GDP ratio reached to 82% from 64% in 2008, more widening will definitely create problems combined with plunging GDP growth rate at home.
Therefore, I believe fundamentals are not matching with the valuations, markets are quoting. I advise to reduce equity exposure.
What holds 2013?
Across the world, growth rates are plunging. Governments are facing steep resistances to enhance debt limits further. Plunging growth rate will reduce Govt’s revenue drastically and that will reduce Govt’s debt paying ability. It will also increase debt to GDP ratios of many nations as in the case of Germany, we saw it exploding to 82% now, from 64% in 2008. Higher ratio will increase borrowing cost for nations and eventually defaulting either explicitly by declaring a nation bankrupt like Greece did or implicitly by devaluing currency.
Severe downfall in the growth rate of China, Japan, Germany and South Korea very explicitly says that world is slowing down. These are 4 major exporters to the world. It will result in reduced growth rates, exploding debts, currency war to cheapen the currency to increase exports again, currency volatility will hurt profitability of firms and that can crash the markets. Japan has already started currency war. Japan cheapened its currency 20% in last 4 months against US. I do not think other exporters will just keep watching Japan’s stimulating efforts. Currency war will worsen the crisis. What is worse this time is,
DO NOT EXPECT GOVERNMENT BAILOUT. GOVERNMENTS ARE ALREADY BANKRUPT. EXPECT GOVT TO INCREASE TAXES AND REDUCE BENEFITS AS GREECE DID AMID CRISIS.
YES, IT CAN BE SIMILAR OR WORSE SITUATION, ONE WE FACED IN 2008.
This is time to reduce exposures from risky assets and to remain on cash.
India, too, facing multiple challenges, too difficult to resolve without destruction.
Current account deficit, budget deficit, high inflation, higher restructured loans, currency volatility, lower IIP, lower manufacturing , topped out global markets, low velocity of money, Japan started cheapening money, escalating geo political tension, higher energy prices, IT companies layoffs, real estate moderating –this is the sneak preview.
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