2012 - A long year for stock markets
Srujani Panda / 16 Dec 2011
The year 2011 will go down in the annals as one of the most frustrating years for the Indian markets. It was a year when the India story started to sound less than convincing to global investors. It was also a year when supply-side constraints sort of imposed a lingering consumer price inflation, which the RBI has tried to hold down with over a dozen interest rate hikes. Unfortunately, the interest rate hikes seem to have only added fuel to the fire. A panic stricken RBI has freed interest rates on savings bank accounts, leading to a free-for-all among banks in an attempt to grab deposits. Liquidity has dried up to such an extent that even the SBI is offering nearly eight per cent returns on deposits for just one week!
The PIIGS (Portugal, Ireland, Italy, Greece, Spain) problem in the Euro zone has awoken the world to the evils of living beyond one’s means. However, a conclave of the wise folks of the European System of Central Banks and a few of the individual countries are putting up a brave front, and offering to pump in additional printed currency. Will this turn the markets around, or is this a golden opportunity to exit? Well, reason supports the latter, though hope supports the former.
Now, the Central Banks are resorting to window dressing. There is a fair chance that the world is heading to a kind of stagflation (with the Central Banks printing more money, and producers not producing more). This may take a long time to unwind, but it looks like we are headed there. The finances of countries worldwide (barring, maybe, a China here and a Russia there) are in bad shape. Political survival seems to be the excuse for fiscal profligacy across the globe.
The Indian economy continues to grow on the back of strong consumer demand. The consumers still have their pockets full, thanks to the services sector growing at a decent clip, and rural India enjoying the benefits of high farm produce prices. In addition, governmental freebies (be it the NREGA from the Centre, or other state-level freebies) provide more thrust to consumer muscle. The banks have also joined the party, with auto loans being doled out at ridiculously low interest rates of six to eight per cent, when SMEs are paying over 15 per cent. Add to this, the liquidity crunch and the weakness in capital markets, and supply bottlenecks grow while the demand continues to rise. A natural outcome of this is inflation. Over a dozen successive doses of misguided interest rate hikes by the RBI have only fuelled inflation, rather than taming it. The Indian political establishment too, has done nothing to encourage investment, being plagued by one successive accident after another. [PAGE BREAK]
Commodity prices will remain soft so long as the global economic growth is weak. Gold and silver continue to shine, as surplus funds chase safer havens. The US dollar is the ‘last man standing’ when it comes to currency, thanks to the tottering Euro.
Amidst all the chaos, our stock markets have held up remarkably well, with valuations still in excess of 15x earnings (that will perhaps fall in the next year). While the one-year picture does not look very good, the Indian market show, if measured from the bottom of the Lehman crisis, is fantastic. Traders have not had a good time, and luck with market timing had perhaps more than its fair share in the way we measured our gains from investing.
Fixed income instruments are offering returns of 11-12 per cent on AA rated paper. SBI is offering as much as 8.5 per cent returns on a week’s deposits. Short-term money is as expensive, if not more than long-term money, as companies are postponing projects due to fund raising constraints. Perhaps one to two year returns on these will beat the stock market returns. For stock market returns to be good, we need falling interest rates. This gives us a great option to buy tradable fixed income paper now, and sell it when interest rates fall (whether they will fall significantly is a debatable issue). I would certainly prefer to stay invested or add gold.
Equities are yet to turn interesting. Perhaps a decline to BSE Sensex levels of around 14000 or so would make them investments of greater value than at the present levels. In the absence of long-term leveraged options, trading in volatile markets will be tough. I would still remain invested in the stocks of companies that are focussed on domestic demand and that have a high Return on Equity (ROE), preferably over 30 per cent per annum. The upside seems capped for a couple of years at the very least. Fixed income returns at 11-12 per cent per annum look all set to beat equity returns over the next couple of years. Unless, of course, we have a great fall and can then buy in
The PIIGS (Portugal, Ireland, Italy, Greece, Spain) problem in the Euro zone has awoken the world to the evils of living beyond one’s means. However, a conclave of the wise folks of the European System of Central Banks and a few of the individual countries are putting up a brave front, and offering to pump in additional printed currency. Will this turn the markets around, or is this a golden opportunity to exit? Well, reason supports the latter, though hope supports the former.
Now, the Central Banks are resorting to window dressing. There is a fair chance that the world is heading to a kind of stagflation (with the Central Banks printing more money, and producers not producing more). This may take a long time to unwind, but it looks like we are headed there. The finances of countries worldwide (barring, maybe, a China here and a Russia there) are in bad shape. Political survival seems to be the excuse for fiscal profligacy across the globe.
The Indian economy continues to grow on the back of strong consumer demand. The consumers still have their pockets full, thanks to the services sector growing at a decent clip, and rural India enjoying the benefits of high farm produce prices. In addition, governmental freebies (be it the NREGA from the Centre, or other state-level freebies) provide more thrust to consumer muscle. The banks have also joined the party, with auto loans being doled out at ridiculously low interest rates of six to eight per cent, when SMEs are paying over 15 per cent. Add to this, the liquidity crunch and the weakness in capital markets, and supply bottlenecks grow while the demand continues to rise. A natural outcome of this is inflation. Over a dozen successive doses of misguided interest rate hikes by the RBI have only fuelled inflation, rather than taming it. The Indian political establishment too, has done nothing to encourage investment, being plagued by one successive accident after another. [PAGE BREAK]
Commodity prices will remain soft so long as the global economic growth is weak. Gold and silver continue to shine, as surplus funds chase safer havens. The US dollar is the ‘last man standing’ when it comes to currency, thanks to the tottering Euro.
Amidst all the chaos, our stock markets have held up remarkably well, with valuations still in excess of 15x earnings (that will perhaps fall in the next year). While the one-year picture does not look very good, the Indian market show, if measured from the bottom of the Lehman crisis, is fantastic. Traders have not had a good time, and luck with market timing had perhaps more than its fair share in the way we measured our gains from investing.
Fixed income instruments are offering returns of 11-12 per cent on AA rated paper. SBI is offering as much as 8.5 per cent returns on a week’s deposits. Short-term money is as expensive, if not more than long-term money, as companies are postponing projects due to fund raising constraints. Perhaps one to two year returns on these will beat the stock market returns. For stock market returns to be good, we need falling interest rates. This gives us a great option to buy tradable fixed income paper now, and sell it when interest rates fall (whether they will fall significantly is a debatable issue). I would certainly prefer to stay invested or add gold.
Equities are yet to turn interesting. Perhaps a decline to BSE Sensex levels of around 14000 or so would make them investments of greater value than at the present levels. In the absence of long-term leveraged options, trading in volatile markets will be tough. I would still remain invested in the stocks of companies that are focussed on domestic demand and that have a high Return on Equity (ROE), preferably over 30 per cent per annum. The upside seems capped for a couple of years at the very least. Fixed income returns at 11-12 per cent per annum look all set to beat equity returns over the next couple of years. Unless, of course, we have a great fall and can then buy in
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