Some predictions for 2009

Jan 5, 2009

In this issue:
» Outlook 2009 by Ajit Dayal
» SBI chief's optimistic view
» Dr. Manmohan Singh's prediction
» Prudent consumers, imprudent government
» ...and more!!

"Prediction is very difficult, especially if it's about the future," said the Danish physicist, Niels Bohr lightheartedly. Well, the current state of affairs in the Indian and world economy makes this quote so true. This is clear from views that experts have on the investment scenario in 2009.

For instance, Mr. Ajit Dayal, Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. titles his outlook for 2009 as "Fog on a rainy day". Herein, he writes and we quote - "Forecasting what is likely to happen in calendar year 2009 is a tough proposition. We are driving in heavy rain - and there is a dense fog all around us."

On his broad investment outlook for this year, he writes - "The speed with which the Indian stock markets recover - and decouple from the global markets - will be a function of how quickly we sort out our own "Made-in-India" problems. Despite these uncertainties, we need to go through the exercise of "asset allocation" to understand how best to position our investment portfolios. And, if there are unexpected changes of significance as the year unfolds (as there were last year), then we need to factor those new unforeseen events and make the necessary changes in our investment portfolios."

"For the moment, keep your mind at ease by keeping aside enough cash - and split any balance you have in an 80:20 ratio for investments between equities (individual stocks, equity mutual funds, and tax-saving equity mutual funds) and gold," he says.

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There's no denying the optimism of Mr. O.P Bhatt, the Chairman of India's largest bank, SBI. He is of the belief that profits for the Indian banking sector will grow strongly this year. In his view, the sector is resilient against any crisis in the world financial system owing to the prudential norms it follows. "No bank has failed in India," is his argument.

In an interview with The Economic Times, Mr. Bhatt opines, "My own sense is that the worst is over. There may be lull for another month or so, but ultimately people will spend...people will start buying."

Well, the way the RBI has reacted to the financial and liquidity crisis and has brought down interest rates, Mr. Bhatt's words are not really without basis. With savings rate for Indian households remaining high thereby providing a cushion against adverse times, consumption spending is not likely to take a big knock going forward.

This can clearly be gauged from a visit to shopping areas. People are still buying clothes, electronics, luxury items and other consumption products. While slowdown has hit footfalls at big malls, it is but a bubble (of malls that have emerged at every nook and corner) that has been pricked. FMCG companies continue to report good numbers and are not thinking twice before raising prices to factor in higher raw material costs.

The biggest change that this slowdown has brought is that people are now spending more carefully that they were in the heydays of easy and cheap loans. As Mr. S. Narayan, India's former finance secretary writes in his article for a leading business daily, "The speculative urge has been dampened, but not the entrepreneurship and drive for self-improvement."

It is not just Mr. Bhatt who is optimistic about the future. Mr. K.V. Kamath, CEO of India's second largest lender, ICICI Bank is equally sanguine. According to him, interest rates in India could fall as much as 5% to 6% towards the second half of the current calendar year. When asked by a leading business daily about the reason behind his new found confidence, he opined, "The speed with which, say for example, bulk (deposits) have repriced themselves at 2-2.5 percentage points in a span of just two weeks gives me comfort to say what probably is going to happen."

While predictions have been flying thick and fast with respect to the GDP growth rate that India would log in, India's Prime Minister Dr. Manmohan Singh is of the opinion that growth rate in FY10 will be lower at less than 7%.

The global economic slowdown is obviously the reason for the lower growth but the PM has expressed confidence that the stimulus packages announced by his government would provide a strong cushion. Growth in FY09 is expected at close to 7%. He urged the Indian industry to invest more in research and development and boost demand for science and technology graduates and researchers.

Dr. Singh has also assured to double the investment in science from the present 1% of the national income to 2%. Given that that there was too much 'creativity' in the financial world, which created the subprime mess in the first place, the PM obviously believes that investments in productive areas such as science will go a long way in ensuring the growth of the country.

"I believe in stocks for the long run - but only if purchased at the right price," said Bill Gross of Pimco, which runs the world's largest bond fund, in his December note to readers. He further said, "That statement packs a real punch. It says that capitalism is and will remain a going concern, that risk-taking - over the long run - will be rewarded, but only from a starting price that correctly anticipates the economy's growth and its share of after-tax corporate profits within it." That's to the point, Mr. Gross!

Renewable energy, roads, education, healthcare and tax breaks are the five pillars on which the Obama-led US government is hoping to anchor the support of the US citizens for itself. The package that will ensure that these are delivered has been christened 'The American Recovery and Reinvestment Plan' and is expected to cost the government in the range of US$ 675 bn to US$ 775 bn.

The attempt to boost consumer demand by spending US$ 140 bn on tax breaks alone, US$ 500 for individuals and US$ 1,000 for couples to be more specific, will make up 40% of the stimulus package. The main goal of the plan, however, is to create 3 m new jobs, most of it in the private sector. It be recalled that nearly 2 m jobs were lost in the US in the first 11 months of 2008.

Whether this final shot in the arm will beat back one of the deepest recessions in more than four decades? Our guess is as good as yours.

While Reliance Communications is promising big offers through its inaugural GSM offer in Mumbai, its closest competitor Bharti Airtel is rising up the ranks. Bharti is now the second largest business group by market capitalisation following Mukesh Ambani's Reliance Industries. The company has lost the second least among its Sensex peers in the last year, and this has helped overpower mighties like the Birla and Tata groups, which have seen valuation of their companies evaporate during this period.


While the Indian consumer remains prudent in his spending, this cannot be said of the Indian government that has created a bog hole in its own pocket. In the name of stimulus and bailing out industries from a deeper crisis, the government is set to see its fiscal deficit shoot up to 5.5% of GDP by March, much above the stated target of 3%.

While policymakers may argue that the very idea of a stimulus means that the fiscal deficit will be larger because stimulus can done either by raising expenditure or giving up revenue, that fact that the government wasted last five years of boom to mend its financial reforms cannot be denied. Wasteful subsides on power and fertilizers, oil bonds to correct its own menace and poorly directed welfare schemes have already cost the government heavily. And mind you, these 'extraordinaries' are not even counted while calculating the fiscal deficit. As such, the actual excess of spending over income is much-much larger than what is reported.

"The economy should turn around by 2010-11," predicts Dr. Montek Singh Ahluwalia, deputy chairman of the Planning Commission. "When will our governments do?" we ask.

Stocks in India closed strong today, mirroring gains in other Asian markets today and strong closing in the US markets last Friday. The BSE-Sensex closed with gains of almost 320 points. The stimulus plan announced on Friday evening also seems to have perked up sentiments in India. European markets are currently trading positive. Gold closed down by US$ 7 today. Here are some interesting insights on the yellow metal from Bill Bonner of The Daily Reckoning - "Over long periods, gold makes no gains at all. It is only valuable when other gains are fraudulent...when there is a crash...or inflation. That is why it is so valuable now. We face all of those things. But over the long run, gold does nothing and goes nowhere. That makes it a bad investment usually and a good investment occasionally."

 Today's investing mantra
"Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected." - George Soros

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