2012: The year that was... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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2012: The year that was... 

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In this issue:
» Sectors: The good and the bad in 2012
» RBI refused to play ball
» India GDP growth slowed down to lowest in a decade
» Bailouts helped EU remain alive
» ...and more!


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00:00
 
2012 was an interesting year. The government of the country was particularly in focus for pretty much most part of the year. First for their inaction. Then for their action. Then for doubts surrounding whether there would be further action. We are referring to the government's stand on policy reforms.

For pretty much the first 8 months of the year, the government was like a dart board for everyone. Investors and India Inc alike criticized it for its inaction. The country was seeing its economic growth slowing down. Investment was drying up. Supply side bottlenecks were leading to stickiness in inflation rates. As inflation refused to come within the Reserve Bank of India (RBI) comfort levels, it refused to ease the interest rates. This acted as a further deterrent to investment resulting in the economy slowing down further. The whole thing was like vicious circle and India was stuck in the middle of it.

Come September the government finally woke up. It introduced reforms by allowing FDI in retail and aviation sectors. But many wondered if this was just a one-off move to save its deteriorating image. Nevertheless the government's change of heart towards reforms was applauded by all. In fact a few weeks ago it continued with its enthusiasm on policy reforms. It announced further measures related to the urea investment policy, land acquisition Bill and setting up of the Cabinet Committee on Investment. Though some of these reforms still await final approval from one or the other House of the Parliament. But still the very announcement of reforms was a welcome relief for the entire country.

But what matters now is whether this enthusiasm continues to roll in 2013 or not. There is still plenty of work to be done if India has to get back on track of stellar economic growth that we all got used to seeing in the past. Reforms and clarity on existing policies is of utmost importance. The latter in particular is something that investors are looking for in order to protect their investments in the country. This is true for not just the foreign investors but for domestic investors as well. Therefore we sincerely hope the reform momentum continues in the future as well.

Do you think the government turned reform friendly in 2012 or do you think these are just one off instances to save its poor image? Do share your comments with us or post your views on our Facebook page / Google+ page

01:05  Chart of the day
 
2012 was a year of frenzied activity in the Indian share markets. Despite the investors' cautious stance given the political hassles and overall economic gloom, the Sensex rose by nearly 25% from January to December 2012 (3rd January 2012 to 28th December 2012). Nearly every sector performed well except for the Indian IT sector. The sector was at the receiving end given the depressed activity in the global arena particularly in the developed world. Since the sector derives most of its fortunes from the developed world the crisis in US and Europe affected it the most. The clear winner this year was the banks with the banking index going up by nearly 56% during the period.

Source: BSE
* Closing price as of 288h December, 2012

01:35
 
A lifetime bureaucrat executing the orders of political masters turns into an independent and bold central banker. That is how best we can describe RBI Governor Dr Subbarao in 2012. His monetary policies in 2012 made the RBI stand apart. While its counterparts the world over played to the tunes of respective governments' demands, the RBI did not budge. Dr Subbarao not just defied the finance minister's and investors' demand for lower interest rates. He also categorically criticized the government's messy finances and sticky inflation. In fact, monetary policy was not the lone issue where Dr Subbarao's will prevailed. He refused to fast track the procedure of issuing new banking licenses. Especially, without necessary amendments to banking regulations. Indian banking may have to go through several hiccups in 2013. NPAs plaguing PSU banks may accentuate the problems. However, we are certain that with a regulator like RBI, Indian financial system is in safe hands.

02:05
 
After the 2008 financial crisis, the Indian economy had shown robust resilience. Many argued that India was significantly decoupled from the global turmoil and would continue with its growth trajectory. For a while, it seemed nothing could stop the great Indian growth story. During the 8-year period from FY04 to FY11, the economy recorded an average annual growth rate of 8.5%. However, the economy seems to have lost steam over the last couple of years. During FY12, India's real GDP growth rate slowed down to about 6.5%. But the current financial year appears to be the worst in the last decade. From earlier optimistic estimates of 7.6% growth rate, the government has cut down its growth forecasts to a meagre 5.8% for the current fiscal. This is the slowest pace of growth since FY03.

It is now evident how wrong we all have been in taking India's growth prospects for granted. While 8% plus growth rate seemed quite achievable a few years ago, now it appears to be a big challenge. Of course, it is not the time to write off India. The opportunities for the Indian economy are tremendous, but only if tapped correctly. Through sound policies and execution, the government will have to reinstate the confidence of the business community to prop up investments.

03:00
 
The debt crisis in Europe once again dominated the headlines in 2012. Greece was already tethering on the edge. This was made worse by a deteriorating macro environment in bigger economies such as Italy and Spain. Not surprisingly most of these economies turned to the European Central bank for a bailout. And after much huffing and puffing the ECB complied. But not before some agreement was reached on austerity measures to be implemented. The central bank in Europe has displayed the same lack of imagination as its counterpart in the US. Previous rounds of stimulus measures have not bolstered economies as envisaged. Despite this, both the central banks have continued to print money at the drop of a hat. Meanwhile, sovereign debt has only ballooned, unemployment has remained firm and there is hardly any noticeable growth in the economies. The only thing that these bailout packages are likely to do is raise the chances of higher inflation in the years to come. The ECB is not keen on the Euro splitting up, but the current state of affairs cannot continue for long. Unless the European countries come up with a more meaningful strategy of cutting down debt, a breakup of the Euro seems more likely.

03:30
 
In 2012 (year to date) gold was up around 6% for the year and is on track for a 12th straight year of gains. So why has gold been on an uptrend for so long? Low interest rates globally, euro zone concerns, and central banker's appreciation for bullion have helped gold prices firm up. But, is the gold rally about to end? Gold prices have been seeing a dip of late. Investors are dumping the precious metal and are instead opting for the greenback. This is a trend that could carry forward into 2013 as well. This is according to noted commodity investor, Jim Rogers. The fears that the United States may fall over the dreaded fiscal cliff and go into a recession have sparked demand for safe-haven investments like the dollar. The dollar is a popular asset that moves inversely from gold in uncertain times.

Gold is currently in midst of a correction that has been going on for 15-16 months now. And it is possible that it will continue for a while longer. Gold bullion experienced its last major correction during the 2008 financial crisis, where it contracted 32%. Most asset classes correct by 30% or so every year or two. As they say, what goes up must come down. But, gold has done that only once in the past 12 years. Well, since a correction seems to be overdue, it may be wise to wait for sometime before investing in this commodity. But, from a longer term perspective, we believe that gold prices will outride any temporary slump.

04:10
 
The world's most powerful democracy went to vote this year. And as expected, it handed the incumbent President, Barack Obama its second straight term. Would it have mattered had the US electorate chosen someone else? We certainly do not think so. For even his rival seemed to have been cut with the same cloth. We are talking mostly about economics here.

What the US needs right now is a leadership that takes some tough hard nosed decisions. And these of course could prove unpopular in the near term. But will beautifully set up the US economy for a long term period of sustainable growth. Instead, what the policymakers have chosen to do is interfere every step of the way. And this has led to the situation going from bad to worse. But will the leadership wake up and smell the coffee? Looks unlikely. Eventually, it will be left to the market forces to drive home the harsh truth. And we just get the feeling that the price to be paid for this will keep on getting bigger as the days pass by.

04:40
 
In the meanwhile after opening the day on a flat note, Indian equity markets are now trading below the dotted line. At the time of writing, the Sensex was down by 20 points (0.1%). Most of the major Asian markets remained closed today. Amongst the ones where trading was held, China and Malaysia closed the year on a positive note.

04:55  Today's Investing Mantra
"Your life must focus on the maximization of objectivity." - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'
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1 Responses to "2012: The year that was..."

r v iyengar

Dec 31, 2012

Dr.Manmohan Singh is the original reforms man as you know. Now that he is at helms of affairs, he would definitely be interested in going further in the process, as he has seen how the reforms had brought about an enhanced growth. However there were a few impediments in his path.
One was Mamta Banerjee, who with her socialist leanings was out to thwart every effort at reforms. Pranab Mukherjee being a politician first and FM next was also very skeptical of many of the measures. He chose inaction as the best alternative.
Pranab being nominated for Presidency was a test case, where perhaps the ruling party realized that some of the constituents like SP and BSP can be used to boot Mamata out.
Government chose to bite the bullet and bring in the raise in diesel prices resulting in Mamta quitting the government.
With most of the roadblocks removed, and pliable parties supporting, now the PM can be expected to go whole hog towards reform process.
However the reforms will come at a cost to the nation
as both SP and BSP will ask for their pound of flesh for sure.

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