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It has been a very long time since I wrote about the economy and markets. To be precise, my last blog was in August 2010. How the world has changed in one year! My last blog was very optimistic. There was a sense of expectancy and excitement about Dr. Manmohan Singh's Government. They say that a week is a very long time in politics. So, it is not surprising that in one year euphoria has given way to despondency.
The intention of writing this blog is to assess the economic and market conditions prevailing in the country as well as globally and to understand its implications on an average investor such as you and I. In my reckoning, the global economy is in a condition that is worse than in 2008. Last financial crisis was sudden - an accident - an emergency and so it got immediate treatment. This crisis is slow - evolving - changing everyday. It is like a cancer. Everybody knows that it will end up really badly but no one has a cure.
Europe is in a mess. Forget the leverage problem, to me the most fundamental problem with Europe is that the economic growth of the continent is not consistent with the life-style and the benefits that the Europeans have got so used to. Also, the demographics are not in Europe's favour. The number of working people as a proportion of total population is declining. It means that less and less people have to work to support more and more. (See http://www.monitoringris.org/documents/tools_reg/agingdemochange.pdf). I am of the opinion that the ongoing crisis in Europe will be the trigger that will push the continent into an extremely long period of very low to negative growth.
USA has the capability to surprise the skeptics by delivering decent growth. Unlike Europe, USA does not need to worry about demographic ageing till 2050 and it has a very dynamic society which thrives on enterprise and innovation. However, in democracies bad politics often trounces good economics and that is a real danger for USA as it approaches an election year. Although the real economy is not in a terrible shape, the American Financial System does have a tendency of getting out of hand and severely damaging the real economy (Remember 2008 - financial crisis triggering economic recession). Thus, risks to American economy remain and it is likely that growth will be positive but very low.
Japan is trapped in an unending cycle of almost zero growth and almost zero inflation. The population is already ageing and it seems that the economic stagnation will continue for the foreseeable future. China is growing but slowing down. In the last two decades, China managed enormous growth by selling goods to Europe and USA. China is a country with enormous savings while Europe and USA had very limited savings. So, what China did was that it happily provided its excess savings to Europe & USA so that they could buy more and more of Chinese goods. It was just like an Electronics Store offering cheap loans to its customers to increase the sales. This model worked wonderfully till 2008. But now, China's biggest customers - USA & Europe are slowing down and China is bound to feel the heat as its economy is primarily export driven. Also, after 2015 Chinese working age population will start to decline and this will also have a negative effect on economic growth.
In contrast to the global economy, the Indian economy is in a reasonably good shape. This year the GDP is expected to grow at a rate of 7.5% to 8.0% which is healthy. However, the problem is that given our level of under-development, any growth rate less than 9% is an under-achievement. Another issue is that by global standards, the Indian economy is quite insignificant. Indian GDP makes up less than 3% of world GDP (See http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)). Hence, until we grow at a rapid pace for atleast next 5-10 years, we will continue to remain a marginal economic power. But to achieve truly rapid growth, we need a proactive and business-minded government which is certainly not the case at this point in time.
In view of the above economic scenario, I can not imagine that Indian equities will give a phenomenal return in the next one year. If Europe, USA & Japan are not growing much and China is slowing down, then it is hard to see how the stock-markets can perform well. If the central banks print more money to tackle financial crisis (QE 3), then there might be a temporary pop in the stock markets, but it will be short-lived. In the coming year, my investments will be guided by the following principles -
The intention of writing this blog is to assess the economic and market conditions prevailing in the country as well as globally and to understand its implications on an average investor such as you and I. In my reckoning, the global economy is in a condition that is worse than in 2008. Last financial crisis was sudden - an accident - an emergency and so it got immediate treatment. This crisis is slow - evolving - changing everyday. It is like a cancer. Everybody knows that it will end up really badly but no one has a cure.
Europe is in a mess. Forget the leverage problem, to me the most fundamental problem with Europe is that the economic growth of the continent is not consistent with the life-style and the benefits that the Europeans have got so used to. Also, the demographics are not in Europe's favour. The number of working people as a proportion of total population is declining. It means that less and less people have to work to support more and more. (See http://www.monitoringris.org/documents/tools_reg/agingdemochange.pdf). I am of the opinion that the ongoing crisis in Europe will be the trigger that will push the continent into an extremely long period of very low to negative growth.
USA has the capability to surprise the skeptics by delivering decent growth. Unlike Europe, USA does not need to worry about demographic ageing till 2050 and it has a very dynamic society which thrives on enterprise and innovation. However, in democracies bad politics often trounces good economics and that is a real danger for USA as it approaches an election year. Although the real economy is not in a terrible shape, the American Financial System does have a tendency of getting out of hand and severely damaging the real economy (Remember 2008 - financial crisis triggering economic recession). Thus, risks to American economy remain and it is likely that growth will be positive but very low.
Japan is trapped in an unending cycle of almost zero growth and almost zero inflation. The population is already ageing and it seems that the economic stagnation will continue for the foreseeable future. China is growing but slowing down. In the last two decades, China managed enormous growth by selling goods to Europe and USA. China is a country with enormous savings while Europe and USA had very limited savings. So, what China did was that it happily provided its excess savings to Europe & USA so that they could buy more and more of Chinese goods. It was just like an Electronics Store offering cheap loans to its customers to increase the sales. This model worked wonderfully till 2008. But now, China's biggest customers - USA & Europe are slowing down and China is bound to feel the heat as its economy is primarily export driven. Also, after 2015 Chinese working age population will start to decline and this will also have a negative effect on economic growth.
In contrast to the global economy, the Indian economy is in a reasonably good shape. This year the GDP is expected to grow at a rate of 7.5% to 8.0% which is healthy. However, the problem is that given our level of under-development, any growth rate less than 9% is an under-achievement. Another issue is that by global standards, the Indian economy is quite insignificant. Indian GDP makes up less than 3% of world GDP (See http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)). Hence, until we grow at a rapid pace for atleast next 5-10 years, we will continue to remain a marginal economic power. But to achieve truly rapid growth, we need a proactive and business-minded government which is certainly not the case at this point in time.
In view of the above economic scenario, I can not imagine that Indian equities will give a phenomenal return in the next one year. If Europe, USA & Japan are not growing much and China is slowing down, then it is hard to see how the stock-markets can perform well. If the central banks print more money to tackle financial crisis (QE 3), then there might be a temporary pop in the stock markets, but it will be short-lived. In the coming year, my investments will be guided by the following principles -
- If you already own stocks, stay invested and do not put more money in stock market.
- If you do not own stocks, stay out of the market till the time there is a major upmove (say sensex crossing 20,000 mark).
- In India, interest rates are at an all time high, so use it to your benefit. Invest in PSU Bank FD's at 9.25%. Some co-operative banks offer around 10%. One can also look at FD's or Debentures offered by top rated companies. This can fetch you returns of around 11% which is quite good.
- Invest some amount in Gold. If central banks print too much money, it will inevitably lead to high inflation. Gold gives very good returns in periods of high inflation.
- The next year will witness extreme volatility and your sources of income (jobs and businesses) can get impacted. Hence, be conservative in your spending and avoid taking unnecessary risks.
