Saturday, June 4, 2011

2011 predictions revisited again

Just like the sea which seems calm at the surface but has massive amount of energy boiling inside it, I am seeing business as usual on the outside but large amount of chaos beneath this calmness. All across the world there is news that is screaming for attention – but one has to connect the dots —we see rioting in ME, increasing fuel prices and spontaneous uprising against corruption and bad governance in India, sovereign debt downgrades in EU and volatility in all the stock markets of the world. The most unusual news that caught my attention is that one state in the US, Utah, has legalised Gold and Silver as currency –are we going back to the Middle Ages? There is fair amount of unusual news around us - but if you look at the business news papers – there is calmness and near normality. No one seems to be connecting the dots, not at-least in public.

In the first big economic pillar - the US,  the public mood is sombre – by June end, there would be no more Quantitative easing ( QE2) – the Fed has pumped $600 B in the last six months and has helped grow the stock markets and commodity markets globally – but QE2 has added just about 700,000 full time jobs in the US – the unemployment stays stubbornly high at around 9% - after all why would any company invest in the US when Chinese and Koreans and Indians can do it far more efficiently. Japan has gone through two decades of slow growth and stagflation. Now it is US’s turns to go through a long period of slow growth.

The other big economic pillar is the EU, where there is a good chance of a crisis that will over time integrate the economies more with more stringent rules – a Greece or Italy or Ireland or even Spain will not create the downfall of EU – it is like saying that a bankrupt West Bengal govt can create a down fall of Indian economy – it will not happen. However, there will be a period of uncertainty for a few more quarters before they are able to reign in the countries having large deficits and get better financial controls in place.

That gets me to Indian markets and the situation here – as I had predicted six months back, there has been volatility in the stock markets – BSE sensex is still hovering around 17,500 to 20,000 – the markets will be range bound for this year – however, I expect the markets to be at the bottom of this range from June mid till about July end – the end of QE2 in the US will suck out the money from Indian markets and there will be opportunities for the smart to buy good stocks at a lower price.

Inflation will be high in India – and to rein it, RBI will still increase the interest rates – this will impact the GDP growth, which will be around 8%. Loans will get costlier. Increasing interest rates will also pull down the stock markets. In all this turmoil – Gold will be the place where investors will run to – we have seen gold giving a returns of 1.5% per month between Jan 1st and May 31st –I believe that Gold ETF’s will be the safest liquid bet even though the prices are high at any time if you enter.

I also believe that real estate is still an attractive option for those who have the money and can spot a good deal –However, real estate investments are very local in nature  and one cannot generalise – the price and the location are important and if done right, can give upwards of 20% per annum returns. If anyone wants to invest in Bangalore – I would be more than happy to help out.