Economy : What 2012 holds in store?

» Which way will the rupee go?
» Can the govt give a saner 12th 5-year plan?
» Will the world bid adieu to Euro?
» China spent 2011 worrying about others' debt problems. In 2012 it will face one of its own
» ...and more!

Investing Mantra

"The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell." - John Templeton 

2011 was marked by quite a few events that directly affected the India Inc. One of the most noted of these was the hike in interest rates by the Reserve Bank of India (RBI)). As RBI continued to tighten the noose, India Inc saw interest burden increasing and eventually funds drying up. This severely dented both their profit margins as well as future expansion plans. 

But come 2012, things are expected to change. The main reason behind RBI's hawkish stance, i.e., the inflation rates, has started to ease off. So much so, that inflation dipped to less than 5% in December 2011. At the same time, India's GDP (gross domestic product) growth rate has come under pressure. Therefore, it is inevitable that RBI would have to reverse its decision in this year and ease off interest rates. 

This would make fund raising easier and cheaper for the companies. However, would it mean better corporate performance as well? Unfortunately we do not think this would happen. 

Indian companies have seen demand slowing down in recent times. This combined with slower economic growth resulting from policy paralysis and government inaction, would hurt the companies' growth. At the same time, higher rupee dollar rates would result in higher input costs. As a result, while companies may breathe a sigh of relief at least on the interest rate front, they would have a tough time combating the effects of the depressed macro factors in 2012. 

Investors would do well to remain cautious in their investment approach. It has become all the more important to carefully scrutinize company fundamentals and track record. Only those with resilient business models and proactive managements would outperform in such an environment. 

While signs of an economic slowdown were evident in 2011, what made matters worse was the sharpdepreciation of the rupee against the dollar. As it is, the deepening debt crisis in Europe has put foreign investors on the edge. While the previous reaction to this was to park money in emerging markets including India, weak economic data in the latter eroded the confidence of investors who fled for cover by withdrawing large sums of money from India. With 13 successive rate hikes by the RBI not doing their bit in taming inflation, corruption ruling the roost and government finances in a state of disarray, investors were looking for an exit from Indian markets. This then put added pressure on the rupee which breached the 50 mark against the US dollar. This then adversely impacted India Inc. both on the revenue as well as profit front in terms of considerable forex losses. 

It would be difficult to predict where the rupee will head against the dollar in 2012. Will it revert back to reasonable levels of Rs 45/US$? It all depends on how the growth of the Indian economy pans out and what the government does to keep its finances in check. This means that the policy paralysis at the Centre will have to end and the government will gave to focus on reforms to instill confidence once again in investors. More importantly, efforts have to be made to reduce deficit. Indeed, a rising deficit only strengthens the case for a weaker rupee.

The 12th five year plan : will be on the anvil from 1st April 2012. While all the previous five year plans till date had set aggressive targets for themselves, none of them deserves a mention as far as performance evaluation is concerned. Take the case of 11th five year plan for example. On numerous occasions, the power capacity addition targets were lowered and now even meeting them is a challenge for the government. In fact, in every five year plan, the Planning Commission comes out with various measures and objectives to improve the health, education and infrastructure standards of the country. But it appears that the policymakers deem formulation as accomplishment. However, as far as the 12th plan is concerned even articulation seems to be a challenge. Despite years of deliberation in making the same, pl anning commission is now unhappy with the way the document has turned out. It is thinking to defer the plan by a few months so that a revised draft can be worked out. This indicates that the planning commission is more serious this time around in aligning their stated objectives with performance. 

However, I believe that delivering to the expectations of 12th plan could be challenging as government is entangled in newly erupted issues of corruption and black money. Also, note that national elections will be due during the term of the 12th plan. A prospective change in the government could further upset the envisaged targets. Till date, reform was the key agenda for every plan but its high time planning commission replaces that with execution and performance. And perhaps 12th plan is the new beginning in the right direction. 

Will 2012 be the year when the world bids adieu to the monetary experiment called the Euro?

Sad as it may sound, most bets are likely to be placed in favour of such a possibility. After all, most member nations that needed help in 2011 are showing hardly any signs of an economic renaissance. And while they stay infected, any further epidemic may take a toll so heavy that it will be impossible for them to recover. The only solution in such a case would be a drastic surgery in the form of having their own currency and thus, walking away from the Euro zone membership. However, it is easier said than done. The transformation may not come without its fair share of economic costs and wealth worth billions of Euros could well be eroded. Thus, it will be a very good idea to keep some gold handy. However, who knows, the storm could well pass without any meaningful damage and the Euro region could go on to forge an even stronger alliance. But still, the rational part of us would give such an event a very small chance indeed.

It is easier to point fingers at others. It is difficult to smell the dead rat in your own backyard. We believe that China will painstakingly realize this in 2012. China spent all of 2011 grumbling at the US' undisciplined money printing and callous monetary policies. However, the world's fastest growing economy may finally realize the downsides of its own fanatic paced growth. Building the world's tallest buildings, largest bridges, fastest train networks at feverish pace over the past decade has certainly earned China a place amongst world leaders. Doing so while growing its forex reserves and keeping its trade balance firmly in the positive also earned it brownie points. But little did the dragon nation realize that the government's ambitious growth plans were leading it into a debt trap. One that threatens t he solvency of the nation's biggest banks. 

Post elections in 2012, the new Chinese government is unlikely to embrace Keynesian economic theories as wholeheartedly as its predecessors. However, with ghost cities and failing banks (due to high NPAs), the Chinese government will realize that building up government debt to the extent of 30% of GDP for unproductive infrastructure is indeed a difficult trap.

2011 will be remembered for public movements that overthrew powerful and oppressive dictators in the Arab world. The ensuing supply disruptions kept crude on the boil with prices breaching the $ 100 per barrel mark. With Libyan oil production getting on track, continued slowdown in the US and contagion fears looming in the Euro-zone; will crude prices cool down in FY12? Not quite so as factors such as heightening Iran-Israel tensions, sanctions against Syria, succession and possibility of strife in Saudi Arab and ongoing violence in Nigeria and Yemen threaten to hinder supplies and keep prices buoyant. 

While political turmoil bolstered crude prices, financial uncertainty in the developed world fueled the gold rally. Even as Eurozone struggles to avert the debt crisis and the US economy staggers to emerge from recession, gold prices have corrected in the past one month. But the tempering has been due to a myriad of other reasons such as profit-booking by hedge-funds, steep appreciation in the US dollar vis-a-vis Euro & marginal improvement in the employment rate in the US. With these factors being transient and providing no conclusive end to the financial crisis, gold will continue to revel in the safe-haven status. 

Among other commodities base metals will remain bearish in 2012 on account of sluggish industrial demand. In agri-commodities wheat and sugar are expected to soften on record production while cotton will see its price decline due to falling demand from developed economics. All in all, barring crude and gold, the commodity bull run is set to ease in 2012