Saturday, October 6, 2012

What is next 12 month outlook – do we stay invested?

I have had quite some queries on the recent market conditions and what is my outlook.  So here are my views.

We all know that our government always knew what is required to be done – but they did not have the political courage to do it. The Congress is now in a do or die situation – if they do not act now, they will find it difficult to showcase their governance record in the 2014 Lok Sabha elections. And hence this recent burst of reformist measures – after all they too need a job after 2014.

The next 12 months, I expect the government to be keeping up this pro reform agenda –they will talk the markets up with one reform a week (something like –“an apple a day____).  India needs capital from abroad for growth and the world markets are flush with cheap liquidity. So the government in India will try its darn best to attract global capital to India.  And the opposition will try to stymie these efforts and that’s something we will need to live with – the Indian political theatre.

But overall the Indian markets should do well over the next 12-14 months.

But that is only half the story.

The remaining half is the global market outlook itself – here, the situation is not that rosy. The economies of US, EU and Japan are struggling to stay afloat –the central banks in these countries are giving large doses of liquidity (it is akin to keeping a patient alive on drips) – without these doses of liquidity, these economies would get into recessionary mode.  The stock markets, the real estate markets and the consumer sentiment in these countries is being propped up by the low interest rates ( cheap money) – this has been going on since 2008 and the economies are not doing any better  - but they are managing to stave off recession.  

Will the situation change in the next 1-2 years?

I do not think so.

These countries will continue to drip feed their economies by keeping interest rates low and infusing liquidity into the economies as and when required. Some of this money will trickle into Indian economy due to our “reformist government” and will keep our stock markets in good cheer.

 So till here everything looks fine – both the global markets and Indian markets will do well in the next 12-14 months even though the global markets are being propped up by low interest rates.

But there is one event next year that could be a game changer - the Iran problem.

With the conclusion of US Presidential elections, focus will be back on Iran. There will be pressure on Iran to give up its nuclear programme and I expect Iran not to surrender meekly. I expect increase in tensions and somewhere in Q2 2012, there could be some kind of flash point. Many scenarios are being talked about – about how it could unfold. It could happen through Iran mining of the Strait of Hormuz, or may happen through the current strife in Syria where Iran, Turkey and Israel get involved as the country dissolves into chaos, or it could be through Lebanon, where Iran could activate the Shiite militia to attack Northern Israel or it could happen pure and simple by Israel delivering a surprise attack on Iran’s nuclear installations.

 Whatever the scenario, there is a likely hood of a prolonged regional disturbance – it could result in oil prices going up, stock markets going volatile and one cannot predict to what extent the global economy will be impacted. This can present opportunities as well as threats and one needs to be careful.

So this is the situation - the India story looks good (12-14 months) – the global story, without Iran problem, looks OK - but the Iran issue is like the looming dark cloud in the horizon.

I would recommend that you stay invested in the Indian stock markets – surely till Q1 2013.

This is a period when gold and stocks will rise at the same time. Gold will rise in USD terms more as there is increase in liquidity globally – and depending on the short term fluctuation in the USD/INR rate, gold is expected to give inflation plus 3-5% at least in India ( i.e. about 13-15% ROI per annum).

Stocks surely could do better than that.

So my advice is to stay invested in stocks and gold and keep a close eye on the developments in Iran.