2013: The year that was... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

2013: The year that was... 

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In this issue:
» Aam Aadmi Party's meteoric rise
» Dr Raghuram Rajan takes over as RBI chief
» Infosys sees the comeback of Narayan Murthy
» US Fed decides to taper QE
» ...and more!

00:00  Chart of the day
If one were to look only at the performance of gold and stock markets in 2013, one would assume that the Indian economy was doing well and that inflation was under control. As can be seen from the chart below, the BSE Sensex largely outperformed gold for the larger part of 2013.

The reality was quite different. Let's look at India. First, consumer price inflation continued to haunt the common man; the biggest culprit being the steep and unprecedented surge in onion prices. The RBI's efforts to tame inflation through rate hikes did not achieve the desired results either. Nor did the healthy monsoons do anything to douse high prices. The Indian economy was also not in the pink of health. Manufacturing and industrial activity remained sluggish and demand tapered off. The festive season also turned out to be a damp squib as compared to the previous years. Naturally, performance of India Inc also suffered.

The performance of the global economy was also nothing to cheer about. The developed world - US, Europe and Japan - did not really see any spectacular recoveries in their respective economies. Unemployment, weak job prospects and bloated government debt continued to haunt these regions.

And yet stock markets in all of these countries including India did better when it should have been gold that should have emerged as the winner. The only explanation for this is 'massive money printing'. Indeed, with the US Fed and Japan continuing their loose monetary policies, this excess liquidity found its way into stock markets around the globe even when the fundamentals suggested otherwise. Not just that, there was a perception of a recovery rather than a real recovery combined with the notion that inflation as a meaningful threat was overdone. All of which led investors to dump gold and head for stocks.

We believe that prudent asset allocation should make room for both asset classes and one should not be sacrificed for the sake of the other based on sentiments and market trends. Moreover, one needs to keep the exposure to gold limited and consider it as a hedge against inflation and currency risks. Hence, we are of the view that both gold and equities should continue to form part of one's overall investment portfolio in 2014 depending on individual objectives and risk profile.

Sensex outperforms Gold in 2013

Do you think that the Sensex will continue to outperform gold in 2014 as well? Let us know your comments or share your views in the Equitymaster Club..

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We could well be spoilt for choice in other areas. But as far as politics is concerned, there's one development that towered over everything else in 2013. We are indeed referring to the almost meteor like rise of the Aam Aadmi Party in the Delhi assembly elections. What further put the proverbial icing on the cake was party chief's Arvind Kejriwal's coronation as its youngest ever Chief Minister.

So, what is it that made the Aam Aadmi Party strike such a huge chord with voters? Well, it will be wrong if we term Mr Kejriwal and his core group as the only catalyst that brought about the change. Of course their contributions did matter. But what was more important is that they shrewdly assessed that people's anger towards the current political class had indeed reached a boiling point. And capitalized on the opportunity by putting themselves firmly at the forefront of this change. Not that we are complaining. Given the massive blunders of the incumbent Government in various areas of governance, AAP's philosophy is indeed a welcome change. We just hope that they live up to the expectations. And in the process also force other parties to take a leaf out of their book. Now this makes for a very exciting 2014, isn't it?

The Reserve Bank of India is one revered institution. And the governors of RBI, right from Dr Y.V Reddy to Dr Subbarao, are seen with a halo around them. Why not? After all, these gentlemen are credited with keeping India's financial system iron clad. Indian banking sector is today amongst the ones most resilient to economic crisis in the West. It was therefore of little doubt that Dr Raghuram Rajan's debut as chief of RBI in 2013 will be received any differently.

The economist, who was earlier associated with IMF, has the reputation of confronting US Fed officials head on. He even questioned Alan Greenspan's monetary policies well before the subprime crisis unfolded. With such a track record, Dr Rajan's ability to help India tide over an unwinding of the QE is not in doubt. What however is under scrutiny is whether the governor will be able to maintain the fine balance between growth and inflation. Also whether, like his predecessor, Dr Rajan will be able to keep government interference in monetary policies at bay.

2013 was a year of many unusual events. One noteworthy event in the Indian IT industry was the return of N R Narayana Murthy as the Executive Chairman of Infosys in June 2013. With Mr Murthy back at the helm with his son Rohan Murthy in tow, there has been a lot of debate about the future of Infosys. For one, Mr Murthy's re-entry along with his son has violated the principles of corporate governance that the company has long cherished. It means that the company's succession planning has failed. A company that claims to be driven by values and processes is now seen relying on a star executive to revive the company.

But for now, Mr Market is celebrating Mr Murthy's comeback. From the time of the announcement, the stock price of Infosys is up over 45%. This is despite several, eight to be specific, exits of senior level executives. In the meanwhile, Mr Murthy has said that it will take at least 3 years to put back the company on track. It remains to be seen how Infosys does during Mr Murthy's second stint.

India was mired with inflation problems in 2013. For most part of the year, the consumer price inflation remained in double digits. Rising food and fuel prices were the main culprits for this. Fuel inflation rose amidst depreciating rupee while food inflation was stoked by unprecedented rise in vegetable prices, especially onions. In fact, during the fag end of the year, onion, a vegetable that makes it to the table of almost every Indian, was expensive than petrol! This brought tear to the common man's eyes. Even tomato prices rose sharply during the year. Inadequate storage facilities, hoarding and wastage were the primary reasons for spiraling food inflation.

While the RBI did its bit by adopting a hawkish approach to curtail inflation, it acted as a double whammy. Rising rates made home and auto loans costlier. This further burdened the common man who was already grappling with higher food prices. Also, higher rates derailed the capex plans and growth continued to suffer.

In short, it would not be wrong to say that India was engulfed with a problem of stagflation in 2013. And this was a failure of the government as RBI can do very little to curb food inflation. The government also paid the price for its inability to control food prices. The UPA government lost four out of five state assembly elections held recently. The UPA chairperson admitted that failure to curtail food prices was one of the key factors behind it. Considering that food inflation impacts every citizen and is a key factor that influences voting decisions, 2014 elections are likely to be no different.

Towards the end of 2013, the US Federal Reserve decided to taper its QE program. The announcement of taper suggested that the US economy is recovering. And it now requires less external stimulus. This sent emerging market stocks and currencies into a tailspin. Rupee was no exception. Taper would mean that the flush of external liquidity which made way to emerging markets including India will now be reduced.

This created pressure on the rupee which tested the 70 per US dollar mark. Also, since taper indicated that the US economy is recovering; investors were inclined to sell off their emerging market portfolios. This put further pressure on the rupee. So, it was a double whammy of sorts for the rupee. There was a fear that taper would restrict future dollar inflows. At the same time, it also led to dollar outflows as investors exited emerging markets. Widening current account deficit further worsened the rupee position.

If tapering continues in 2014, rupee is likely to remain under pressure next year as well. However, considering that India is still an attractive long term story, foreign money will continue to flow into India. While tapering may reduce this inflow, if red tapism and investment restrictions are reduced, more investors will be keen to invest into India. This could nullify the tapering impact. And give rupee a necessary breather.

In the meanwhile, Indian stock markets are trading strong. At the time of writing, the benchmark BSE Sensex was up by 28 points (0.13%). Power and Oil and Gas stocks were the biggest gainers. Most of the Asian stock markets were trading higher led by China and Japan. The European markets opened on a positive note.

04:56   Today's investing mantra
"To be a successful investor you must divorce yourself from the fears and greed of the people around you, although it is almost impossible." - Warren Buffett
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