Markets in 2012

2012 - Make or Break Year for Indian Economy

Recap 2011: 2011 has ended & it would be remembered in India for mainly these - Corruption, High Inflation, Depreciating Rupee.

To elaborate on the above 3 main points - Corruption cases against key ministers put Government on a back foot which meant that key reforms or the bills were tough to be passed. Government attempted to bring in FDI but was strongly opposed. There were no significant orders for Power or Infrastructure companies. Credit growth slowed. Policy paralysis meant that FII's started losing confidence in India's Growth Story - They started pulling money out of the markets - This lead to Currency Depreciation - Indian Rupee depreciation also made matters worse for FII's, as DEFTY (Benchmark Index NIFTY in Dollar Terms) is down by more than 35% compared to NIFTY that is down by 25%. 

On the other end the Central Bank (RBI - Reserve Bank of India) was busy tackling inflation. It made it very clear that bringing down Inflation is their first priority (Even at the cost of Growth getting affected). What followed this hawkish stance was a series of 7 hikes in interest rates in 2011 (2010 had seen series of 6 hikes). This meant that Growth had to take toll. the recent October month IIP data (Index of Industrial Production) saw a degrowth to the tune of 1.9% (Chief destructor in the Index was Capital Goods sector that saw a degrowth of 25% - Partly because of very high base figure & major part due to lack of any industrial activity).

Where do we stand as of now:

• Inflation is coming under control & by March'12 it would be around 7%. Food Inflation is around 6 years low (Partly because of higher base of last year).
• Central Bank has indicated that the focus now is on bringing Growth back in the economy after Inflation is coming under control. It expressed a Dovish stance wrt to Interest rates & the cut in rates may come some time in Q4 FY12E or Q1FY13E.
• Higher interest rates has taken a toll on Rate Sensitive sectors & this has meant lower Gross profit for these companies resulting in lesser tax payments - Leading to lesser Revenue collection by Government.
• Policy Paralysis also has meant Currency Depreciation - In turn has taken toll on lot of Companies'
• For government its been a really tough year as the revenues are down & GDP is under pressure (Q2's GDP was sub 7% first seen since June'09). Due to non-conducive environment to divest their stake its turning to the route to raise more debts - This means more pressure on the Long Term Yield. Government as per recently announced schedule is expected to raise roughly 1.5 Lakh crores in Treasury Bills in the current quarter. Government's move to raise such huge money in the last quarter is an indication of how cash crunch the government is & how bad the Fiscal & Current Account Defict Numbers can be for the current financial year. Estimates suggest that Fiscal Deficit can be as high as 5.5-6% of GDP & Current Account Deficit to the tune of 3.5% to 4% of GDP.
• In a way 2012 can well be a make or break year for Indian Economy at least in terms of attracting foreign capital. Currently India has least weightage among BRIC nations in Portfolios managed by Foreign fund managers. Corruption & Policy Paralysis are the main reasons for them to keep low weightage. India has taken first step towards attracting foreign capital by allowing Qualified Foreign Investors (QFI) to invest in Indian stocks directly. Their investments would be limited to 10% to Paid up capital of the company. Also no single QFI can hold more than 5% of Paid up capital in any Company.
• Its been 10 years since the term BRIC (Brazil, Russia, India, China) was coined by Goldman Sachs Chief Jim O'Neill. Indonesia is doing good in terms of Policy reforms and that might attract capital going forward. So the writing is on the walls in terms of FIIs flow. I in BRIC may remain but India may well be replaced by Indonesia if policy paralysis continues!

NIFTY Monthly Chart

Long term excellent buying Opportunity in NIFTY would be around 4300-4200 all the way to 4000-3800 levels (If we manage to get there). Best thing to do would be start investing part of capital from 4400 level on wards during every declines. This is easier said than done as Mind would say to wait it out to buy at the extreme bottom. By now one should know its extremely difficult to catch a top or a bottom. So buying around the bottom (+5%) should be a feasible approach. So one should make up his/her mind with the levels & buy quality stocks around those levels in a disciplined manner.

Bottom Line: I am sticking my neck out to say that the range for the year in NIFTY in 

Good Case Range Would be 4200-5700. Bad Case Range would be 3800-5400.

Themes for 2012

• Bullion: Sell Gold, Buy Silver.
• Currency: The new floor for USDINR may well be 50 & range can be 50-55 for the entire year.
• Bonds & Equities: Buy Dynamic Bond Mutual Funds & Good Quality Equity Diversified/Multi Cap Funds. Balanced Funds would give good returns with Interest rates set to fall & in later half equities expected to fair well.
• Second Half of 2012 (July-Dec) to be better than the first half of 2012 (Jan-Jun).

Wishing you all a Healthy, Wealthy & a Prosperous 2012