What 2013 holds in store for investors? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What 2013 holds in store for investors? 

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In this issue:
» A currency war in the offing?
» Will the cash transfer scheme be a game changer?
» Big bang reform Budget in store?
» A hard landing for China in 2013?
» ...and more!

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00:00  Chart of the day
Trailing 12 month (ttm) price to earnings ratio of 17.5 times. Price to book value ratio of 2.9 times. Dividend yield of 1.6%. These valuation metrics of the benchmark BSE Sensex at the end of December 2012 may not offer you clues about where Indian markets are headed. Nor do they reveal enough about what kind of returns investors can expect in 2013 and beyond. However, we believe that there is no need to adopt any new approach to investing in the new year. Irrespective of the economic, corporate, political and market dynamics. On the contrary, putting the data into perspective can tell you exactly how the tried and tested value investing approach will work better!

Compare the valuations of the benchmark indices in India with that of global indices for instance. Now the Sensex appears fairly valued when compared to most indices in Asia, except Japan. In fact, even the valuations of select European and American indices pale against that of Sensex. In that context it would be fair to assume that global investor interest in Indian stocks could be edgy. Rather, Indian stocks would continue to elicit interest if economic situation in the US or Europe turn for the worse. Or if Indian companies post stellar growth in earnings to justify their valuation multiples. Absence of this in the midst of abysmal policymaking could ensure that global investors pack up from Indian markets, causing valuations to slump.

Valuations apart, company fundamentals can also be an important yardstick to compare against domestic and global peers. Your favourite stocks need to be evaluated in terms of whether they fit the bill any longer. At the same time, be on the lookout for undervalued gems in 2013 that offer a well managed and resilient business model.

Data source: Yahoo, Bloomberg

Thus investors need not worry about doing too many things right with their investment portfolio in 2013. Quoting Warren Buffett, "You only have to do a very few things right in your life so long as you don't do too many things wrong."

What are your 'investing resolutions' for 2013? Share your comments with us or post your views on Facebook page / Google+ page

Policymakers in the developed world have perhaps tried most of the tricks in the book. But they have barely been able to inject life into their economies. So the attention has now turned towards eyeing markets outside of one's own borders. In other words, boosting exports. This is easier said than done though. Simply because every major country is also aiming to do the same. Any idea what this effort could translate into? A full blown currency war we believe. In fact, the first salvo has been already fired just as the year was drawing to a close. A statement by the newly elected or rather re-elected prime minister by Japan that we will weaken yen in order to boost exports has set the tongues wagging.

What more, the Japanese Yen even fell to a two-year low against the US dollar. We won't be surprised if other countries also follow suit. And hence, the year 2013 looks likely to be the year where we could be witness to large scale devaluation of currencies. As to how long this will last and in what manner it will end, well our guess is as good as yours. But it would certainly help if gold, the only currency that cannot be manipulated, is given some place in one's portfolio.

Budget 2013-14 will be one to watch out for. Not just for cues on the implementation of Goods and Service Tax (GST). Or the Direct Tax Code (DTC). But the government may want to make the most of the start to the 12th Five Year plan period (2012-17). Notably the final 12th plan document has been approved just a few days back. And it will be a welcome surprise if the Planning Commission does its bit by pushing forward some reforms through the Union Budget. Ones that will ensure that the outlay during this plan period gets its optimum utilization. Also, restoring investor confidence will be the Finance Ministry's top priority in 2013. Not having its way with the RBI on interest rate cuts, the FM might not lose the opportunity to present a feel good budget for investors. Hopefully, that will also throw some light on fiscal discipline and budgetary management by the government.

The next general elections are set to be held in 2014. Not too far away. The UPA has had a terrible year what with all the corruption scams, economic slowdown, high inflation and government inaction. No wonder the government is in a panic mode. And it is willing to do anything to please the vote bank. The direct cash transfer scheme is a glaring example of that. As the term suggests, the government is set to make cash transfers the default system for welfare delivery.

The question is- are we ready for this? Do we have the necessary infrastructure to support this? There are some pre-requisites to the success of cash transfers. One, people need to have bank accounts. Second, the money should go into the right account. Third, the beneficiaries should have easy access to those accounts. It is a worry how the government will manage to reach the poor, especially in rural areas, where bank branches and ATMs are scarce. Moreover, the Unique Identification Authority of India (UIDAI) has so far covered just about one-sixth of the population.

What more, the pilot project launched in a town in Rajasthan seems to have failed to please the residents. Launched in December 2011, many have complained about several loopholes. In fact, several members of the National Advisory Council (NAC) have expressed concerns about the haste with which the government is pressing to roll out the scheme. Apparently, the government is in too much of a hurry to bother. Its eyes are set solely on the forthcoming elections. And that is all that seems to matter.

2012 was a dull year as far as the Indian economy is concerned. After witnessing stellar growth rates for quite some time, the GDP growth rate fell to below 6%. The big question now is will things get better in 2013? Well it actually depends upon the government. A large part of the growth till now was a result of a booming global economy combined with robust domestic demand. The latter in particular helped the country out when the global economy sank after the 2008 crisis. Now to get back to the 8% growth levels, the economy needs a booster shot. This would come in the form of continued focus on economic reforms. This can and will help in clearing up the bottlenecks that are plaguing the supply side. At the same time, reforms can help improve the country's image in the eye of the investors thereby helping it get the much needed investments. Once these issues are sorted out, inflation is bound to come under control which will lead the Reserve Bank of India (RBI) to cut interest rates which will further boost domestic demand. Thus the entire cycle for economic growth would be able to get back on track. But as we said, it all depends on the government. If it wants, India can get back to 8% plus growth rates. But if it goes back to its lazy self then even the 6% growth would become elusive.

Rather than planning their New Year celebrations, lawmakers in Washington are busy trying to avoid the looming fiscal cliff. Fed Chairman, Ben Bernanke has made it clear that the central bank lacks the necessary ammunition to counter the drag from the looming US$ 600 bn combination of tax increases and spending reductions. But, the Fed's policy of continuing to drive down long-term interest rates until unemployment hits 6.5% may do more harm than good in 2013. This monetary easing can remain in place for years, till the magic number is reached. Quantitative easing hurts savers and older Americans on the fixed-income front. It also frustrates younger people who can't afford to take advantage of the historically low mortgage rates. However it helps anybody able and willing to borrow as they can get funds practically for free. But the one dangerous section of society it helps is Wall Street bankers and traders. Investors are constantly trying to improve their investment yields. Wall Street is ever ready to provide high-risk, high-return, but low-quality products. Well, we know where the country landed up the last time this happened. The question is whether history will repeat itself?

Like many of its peers in Asia including India, China too witnessed some slowdown in growth in 2012. So the question to be asked is will 2013 see a hard landing for the Chinese economy? China's success so far has largely been on the back of exports. And exports are still likely to be under pressure in the coming years. This is because the US and Europe are still grappling with massive debt and recession. So unless domestic consumption catches up, the country could find it difficult to sustain growth rates of 10% plus. Moreover, China needs to keep a watchful eye on property price inflation. Indeed, indiscriminate lending to this sector in the past has raised fears of bubble formation. The other challenges that the dragon nation faces from a longer term perspective are rising income inequality and upward pressure on wages. The latter especially could impact its low cost advantage which has been instrumental in turning the country into a manufacturing behemoth.

Buying interest in commodity, telecom and banking stocks kept the benchmark indices in Indian equity markets firm throughout the trading session today. The BSE Sensex was trading higher by around 179 points at the time of writing. Most other major Asian and European markets are shut today.

04:50  Today's Investing Mantra
"Even when the underlying motive of purchase is mere speculative greed, human nature desires to conceal this unlovely impulse behind a screen of apparent logic and good sense." - Benjamin Graham

Equitymaster Wishes You A Very Happy And Prosperous New Year!
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