The near certain prediction for 2012

Jan 17, 2012

In this issue:
» Jim Rogers predicts QE3 on its way
» Euro rescue fund also loses its AAA
» Railways' PPP projects in a mess
» Investment bankers to be more accountable for IPOs
» ...and more!

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Take any asset class, equity, debt, real estate, commodities or precious metals. The certainty with which one can predict the direction for the prices of these in 2012 is at an all time low. Neither is there any certainty about capital flows, nor is the demand supply scenario offering sufficient assurance about near term prospects. Hence projecting their near term prospect is akin to throwing darts. However, when it comes to the movement of currencies, there is hardly any like the Indian rupee that offers a near certain unidirectional prospective. And that is upwards! Mind you, this is not to speculate about whether investors can make profitable investments in currency derivatives using the rupee in the short term. That calls for more detailed research. But what seems near certain to us is the fundamental prospect of the rupee strengthening against the US dollar by the end of 2012, after losing as much as 16% in 2011.

Now the Economist's Big Mac index that measures the effective purchasing power of different currencies by comparing costs of McDonald's popular burger in various countries has been professing the Indian rupee to be undervalued for long. Hence we are not surprised when the index showed the rupee at rock bottom versus other currencies in 2011. However, given that burgers are still not a very popular food item in India, except the metros, we obviously cannot base our conclusion on its prices.

Economic recovery not just in Asia but also in the US, reversal of capital flows, benign inflation and narrowing trade deficit are bound to make the rupee dearer. As the panic over the euro crisis settles, investors would certainly look for capital allocation in economies offering reasonable risk adjusted returns. India is certain to feature amongst those. No doubt, the pace at which the RBI eases interest rates and the government approves reforms will play a critical role in the upward movement of the rupee. However, as the leading software exporters have pointed out, the strengthening of the rupee is just a matter of time in 2012. What this means is that companies burdened with steep cost of imported inputs or expensive forex denominated debt will heave a sigh of relief sooner or later in 2012. At the same time, exporters booking forex gains in 2012, will not see the profits lingering for too long. Hence investors need to ensure that they factor in more rational and sustainable rupee-dollar rates for judging the long term prospects of their stocks.

Do you think the rupee will appreciate against the US dollar in 2012? Let us know your comments or post them on our Facebook page / Google+ page.

 Chart of the day
If mere statistics were a good indicator of social well being, India and China should have topped the list of countries that have uplifted the poor over the past 5 years. If one looks at the data showing prospective change in per capita real GDP (adjusted for inflation), India and China top the list of countries to show a positive change during 2007 to 2012 period. As today's chart shows, as per Economist's estimates, India and China will show changes of 34% and 52% respectively for this period. However, the inequality in income levels in both the Asian giants is a different story altogether.

Data source: Economist

If you thought money spending by politicians at the time of elections is just an Indian phenomenon, let us tell you that this is a wrong piece of information. US, the world's largest economy is also guilty of performing the same act. At least that is what famed investor Jim Rogers will have us believe. Rogers is of the view that the US Government does its best to juice up the economy during election years so that the ruling party comes back into power. And since it has run out of funds to undertake massive amounts of spending, a third round of quantitative easing could be well on its way as per Rogers.

If such a prediction does indeed materialise, Rogers advises investors to stay invested in what else but commodities. The prime reason being that irrespective of whether the economy does well or gets worse, commodities will end up giving good returns to investors. We certainly cannot find flaws in this argument, can we?

Many investors have burnt their fingers by putting their hard-earned money in shady Initial Public Offerings (IPOs)which are often subject to manipulation by investment bankers and promoters. As a result of this, the investor confidence has been on a downward spiral. In a recent probe, the Security And Exchange Board Of Indian (SEBI) has actually found out that cases where proceeds from the IPO were either misused or diverted.

To make sure that such cases don't recur, the market regulator is planning to tighten the noose around investment bankers. The job of investment bankers may not get over once the company gets listed on the stock exchanges. SEBI is planning to make the book running lead managers (BRLMs) managing the IPO responsible for the end-use of the proceeds. Chances are that the investment bankers may have to submit a quarterly report to SEBI on the status of the proceeds for a period of up to one year after raising the funds. We give a thumbs up to this important move. It will certainly make promoters and investment bankers think twice before taking investors for granted.

The Euro zone crisis seems to be intensifying. In the latest news on the zone, ratings agency Standard & Poors (S&P) has downgraded the Euro zone's rescue fund's rating. The Eurpean Financial Stability Fund's rating has been downgraded to AA+. In addition to this, the ratings of two of its guarantors, France and Austria, have also been cut down. The result is that the EFSF's ability to raise cheap funds has now come under risk. The cheap funds have been raised by EFSF to fund the numerous bailouts that the Euro zone has undertaken. If it is unable to raise funds, then it would have to cut down on the loans that it hands out to the member countries. Though other rating agencies have not followed S&P's move, the funding capability of EFSF has come under question. Not that it matters. Because the size of funds required by the Euro zone to come out of its troubles, are so huge that even EFSF would find it tough to bail them all out.

Poor logistics and infra bottlenecks helped contribute to high inflation in India. Now despite softening food prices, inflation may still remain above comfort levels if these problems persist. The Indian Railways' initiative to ease these issues by connecting inland cargo lines and ports through public-private-partnership (PPP) projects has also run into a mess. A few companies were set up as special purpose vehicles to implement these projects. However now these projects look unviable as there is a 14% cap on the rate of returns they can receive. Rising interest rates have also discouraged players. Cost overruns and land acquisition woes are also affecting projects already under way. Traffic projections are also not going as planned. India is expecting a large chunk of private sector investment in infra. For this it really needs to improve its archaic policies and make them more investor friendly. Else we have to continue to deal with crumbling bridges and aged ports.

Taking cues from their peers in Asia, the indices in Indian stock markets remained well above the dotted line and made inroads into the positive territory today. Commodity, auto and engineering stocks led the pack of gainers. At the time of writing, the BSE Sensex was trading 275 points (1.7%) higher. Indices across other key Asian markets also closed higher while those in Europe have started on a positive note.

 Today's Investing Mantra
"The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers." - Warren Buffett

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6 Responses to "The near certain prediction for 2012"

Tikam Patni

Jan 19, 2012

Indian Re value is always linked to election time. When elections are forthcoming, the Re value is always kept low so that our Netas can get maximum value for their money lying abroad transferred here and the Re value strengthens after the elections when they want to transfer back the surplus left over. There is no other rocket science to it.



Jan 17, 2012

Two observations on your notes today. While it may seem the per capita has increased over the past five years, according to a study pub. in TOI, actual nos. of hungry, malnourished, starvation deaths have all increased in India, during these past years. So for whom and who are the people,who have flourished in our country. the poor have become more poorer, while the rich also go on increasing and the gap between the poor and the rich is just widening. Please give a thought.

Secondly about IPOs'. I have written this many a time, but never got any feedback: Why not make it compulsory that all New listing will in "trade to trade" segment for a minimum of 1 year. If bought make the payment, and if sold give delivery. It would solve the problems of manipulations. Over and above the action inititiated against the specified peopleby SEBI, T to T will definetly solve the issue.
Thanks Damani


Digambar Kulkarni

Jan 17, 2012

Finally one should compare the pleasure that one gets from a Burger to that from a Wada-pav.

Berger Rs 50, pleasure 60/100
Vada-pav Rs 15, pleasure 90/100

Re is definitely undervalued!



Jan 17, 2012

rupee is overvalued and it is high time it should correct, rupee in near future will lose and should peg in range of 60 a dollar


Abhay Dixit

Jan 17, 2012

I think Mac index is trash. Burger is nothing more than wada-pav.Our Wada-pav costs Rs. 10.00. So now tell us if Rs. is undervalued or overvalued.



Jan 17, 2012

I don't know whether it will appreciate are not, but definitely it should appriciate to its correct value.

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