Friday, December 30, 2011

My 2011 predictions revisited and where to invest in 2012

In retrospect 2011 was a tough year to predict – in Jan 2011, we were still talking of “green shoots” – now that’s a forgotten phrase. As of Jan 2011, the Europe crisis was in Portugal, Ireland, Greece and Spain – and it was largely under control. No one could have predicted the natural disasters in Japan and Thailand and no one, absolutely no one, could have foreseen the what happened in Tunisia, Egypt and Libya. The Anna Hazare phenomenon in India, the Occupy wall street protests in US, anti Putin protests in Moscow, anti economic policy protests Israel, Spain and London are all pointing to a global restlessness amongst the youth – there is an anger against governments and most governments are today less popular than they were in Jan 2011. All these were not foreseen 12 months back.

Having said that, my 2011 predictions were fairly correct –

  • I had predicted a GDP growth slowing down – that happened.
  • My prediction on rising interest rates through 2011 was fairly bang on target.
  • I had wrongly predicted the markets to give positive returns – in reality, the Indian equity markets have given a minus 25% returns in 2011– so here I was wrong (as an excuse, I must say that almost every equity analyst from Citigroup to Credit Suisse to Morgan Stanley had predicted that equities would do reasonably well on 2011).
  • I had predicted Gold to do well and I had recommended it all through the year – here I was correct – 2011 was, in fact, a “Golden year” – Gold gave a 30% return over the year.
  • Real estate was another area where I had predicted that there will be not too much returns in 2011 -  but I had recommended it with a three year time frame- actual numbers are difficult to get – but NHB does a survey that you can see at - the data here needs to be studied on the basis on the last four columns and you can see that there has been good appreciation (above 10%) in residential real estate prices in  Faridabad, Chennai, Pune, Bhopal, Mumbai & Delhi  and there has been low appreciation (below 10%) in residential real estate prices in Hyderabad, Patna, Ahmedabad, Jaipur, Lucknow, Surat, Kochi, Kolkata & Bangalore. So I believe here too I was fairly correct in my predictions.

So what will be the key themes for investing in 2012 for us in India?

I believe 2012 will be a tough year – the big picture is as follows:

  • Indian economy will slow down a bit –reforms are the way out and our government will need to push through a few reforms if we need to be anywhere near an 8% growth
  • Europe problems are expected  to dampen the markets for the first few months –I am optimistic that it will not result in a Lehman like crash – the Europeans will find a way out (even though a few countries like Greece and Italy will be bruised badly)
  • The US economy will limp through a 1-2% growth in 2o12 (just like in 2011) – but in the absence of other alternatives, the US markets will be deemed as the safest place to be and US Dollar will be strong and the US Bond rates will be low
  • Chinese economy too will slow down in 2012 ( it already has) –  and the challenge there would be growing their domestic consumption as currently 65% of Chinese GDP is export based.  
  • And then are there are elections in US, France, Russia and a party leadership change in China in 2012 -so these will impact the government actions in the coming year.

So where do we invest?

If your investment is for one year timeframe –I am afraid, you do not have too many options – but if you are looking at three years and above, 2012 will offer you lots of opportunities - in fact there are great opportunities available right now.

The four big options that anyone has are – Investment in Debt, Equity, Commodities and Real estate.

Debt based investments in 2012 will be popular –low risk and inability to understand equity markets will drive people towards debt markets – Interest rates in India will go down gradually – starting Q2, I expect RBI to slowly reduce the interest rates – so you will find long term debt based funds which have debt issued in 2011 (when the rates were high) giving higher returns in 2012 as the interest rates go down. So here is the first opportunity for anyone who has a one or two year investment timeframe – invest now in Long term debt funds which have portfolio of 2011 debt –you can expect about 12% returns on these  – you can see some of the details of these funds at - as you can see, they have not been giving good returns till now as the interest rates have been going up – now I expect them to give better returns as the interest rates start to go down in 2012.

Equities will present long term opportunities in Q1 and Q2 of 2012– In fact even now, there are many equities that are priced attractively in the market – I have been investing in equities selectively since Q4 2011 and I recommend the same to anyone who has a 3 year plus time frame –as we all know, the value of a stock globally is determined by it’s earnings growth ( EPS growth) – but the price of the stock in India depends on the mood of FII’s  - right now the FII’s are net sellers in Indian markets and hence there are stocks that are good long term buys that are going cheap. I have listed out a few stocks in my blog in October and I will list out a few more stocks in my next note in Jan – but needless to say, these are opportunities with a three year time frame – so for those who are ready to invest for three years, you will get a 20% plus return per year by investing in these stocks.

When it comes to commodities – I do not track anything except Gold–so even though Indian markets for other commodities ( like grains) did perform well in 2011, I cannot comment on them. I believe Gold will not give more than 15% returns in 2012 in Indian rupees – It will beat Inflation in India – so it not unsafe – but there are better investment options in 2012 – so if you are investing now, Gold is not the place to invest –but if you have invested in Gold in 2011 or before – you can chose to rebalance your portfolio or chose to stay in Gold – you will not lose money.

Real estate will start showing signs of appreciation – but remember that  real estate is for those who have an investment time frame for 3 years plus– Investment in urban (not rural) areas is recommended – if you can buy a house or flat or urban land anywhere in India ( with a caveat that the location has to be an upcoming location and it has to be a legally clean asset) – you will make 15-20% asset return per annum. Real estate in fact is the safest bet as of now – as it is much easier to identify a good real estate opportunity than to identify a good equity opportunity and India’s urbanization story is still going strong even though the India growth story has dipped a bit.

So for 2012, I recommend

  • for short term investors – Debt funds and
  • for long term investors – Select equity and Urban real estate.