THE YEAR THAT IS WILL BE THE YEAR THAT WAS....

(This appeared in the recent issue of MoneyLife)

The sun shone, having no alternative, on the nothing new. —Samuel Beckett, Murphy (1938)

By the time you read this, you may have read umpteen articles on ‘where to invest in 2011”. Of course, each one is a forward looking piece and the equity markets could promise anything from a modest fifteen percent return (for the year) to usual homilies like “equities are best for the long term “. None of us bother to read what we read last year this time and how much of the oracles’ prophecies came true. I am also guilty of indulging in star gazing and it is fun to carve out a slice in time and predict what the markets will do. There is a fifty percent probability that we are right. Of course, where we can all go horribly wrong is in our picking of stocks, sectors etc.,
The best way is not to look at the change in the calendar as anything spectacular. In the life of a company, dates come and go. If a company is doing well, its earnings grow and shareholders remain happy.
As we step in to 2011, we are more informed. We now know that our country is amongst the most corrupt nations in the world. No party is free of guilt, with each one having abused power for personal gains. The most dirt can be found where there is a ‘discretion’ given (often, taken) by an individual for dispensing favours. Corporate India is perhaps the source of all guilt. From the days of licensing to using corporate riches for personal gains, Corporate India has been treated like a punching bag by the captains of industry. I think in case of corporate and political India, it is safe to assume “Guilty until proven innocent”.
Domestic economy is on a tear so far as prices and demand goes. The key question is whether the rising prices will impact demand? Supply bottlenecks will take time to get resolved. Investments in infrastructure are happening, but at a pace that is snail like. The government is using capital receipts (sale of shares, sale of licenses etc) to fill revenue deficits, which is a disastrous thing. The current account deficit (imports minus exports) is running at nearly six billion dollars every month! This gap is getting narrowed by capital market inflows. Again, a structurally weak filler.
Domestic inflation, driven by high demand, slow catch up of supply is also driving the rupee down. 2011 is ominous. If the global economy recovers, India will face a problem of high prices in crude and commodities. This will weaken our rupee further. Global protectionism will also contract the margins of export oriented service industries.
So, the investment theme does not change at all, as far as I am concerned. Let us continue to do what we do, with more focus. Look out for value to preserve our wealth and look for growth to place our bets on higher return opportunities.
If the global economy is going to recover, I will perhaps make one big change in my investment strategy. I will look for some India based multi nationals that have made a base in India for some global products. And another thing to evaluate is whether one should invest in equities overseas. Of course, most of the global markets are at two year highs, but then the pump priming which the world has done, has resulted in almost all the money coming to the equity markets. Entities like Citibank have used the hiatus to revamp business, write down old sins and planning a return to old times. So, global stocks may actually head much higher if the world recovers. Maybe some of it is in the price already. Global interest rates are still soft and till consumer confidence (which is abysmally low worldwide and pump primed by monopoly money) is back, we cannot call it a recovery.
Yes, we will be closer to another election. Politics is getting murky day by day and with all parties being of the same shade, there is unlikely to be any difference irrespective of which one is in power. What is sad is that each political party is busy throwing apparent ‘freebies’ at the populace and in the process destroying the fiscal discipline for good. The combined fiscal deficit of the states and the centre is in double digits. And it is very likely that we may see one more state added to the Indian map by creating more division. All this will shift focus from growth and development. 2010 was the year of scandals and 2011 will be spent in cursing politicians and fixers. In all this hue and cry, companies will continue to make money. Inflation will be a constant worry. Hopefully, business will not be throttled by regulatory seizure.