We live in neither the best of times, nor the worst of times. All indications, at least on the macroeconomic front point towards a year, which may not be happy after all. For that matter, even 2010 was not as happy as the previous one simply because the broad Sensex gave returns of just above 17%. Contrast this to the returns in 2009 when the Sensex gave bumper returns. Of course, this came on the back of the collapse of 2008. The other indices like BSE 100, 200 and 500 gave returns of 16.1%, 16.2% and 16.4% respectively, which is in the same range as the Sensex. On the sectoral front, autos had a good run and banks gained renewed interest as they turned out to be the best performers.
The Realty sector continued to bleed on the bourses as it fell over 25% for the year. It was surprising to note that realty stocks have not kept pace with the increasing real estate prices. Many real estate firms are trading at less than half their 2007 peak price. May be the market knows something which we are not aware of. Capital goods also under-performed significantly giving less than 10% returns for the year. The metal index grew by a mere 1.1%. I am quite optimistic about the capital goods sector for the simple reason that the capex cycle has to start sooner than later; there are no two ways about it. Maybe this year, metals and capital goods could outperform.
The year was a year of contrasts indeed. The first half saw heightened levels of optimism and by Diwali the fireworks on the Street were such that hardly anyone doubted the ability of the indices to scale to new peaks. Sadly, new highs remained a hope as ‘Golmaal’ became the buzzword even outside theatres. The government’s joy of gaining sufficient moolah from the 3G auctions saw a huge disconnect as the 2G Scam revealed potential loss of billions to the exchequer.
The 3G auction brought in a bonanza which helped contain fiscal deficit. Tax collections were on the rise. Monsoon was normal and aided in controlling food inflation earlier in the year. As the months passed, food prices are hitting the roof. Newspaper reports mention a single egg at Rs4. Tomatoes at Rs50 a kg could make the buyer red in the face and onions at around Rs100 a kg is now off the plate. This reminds me of 1997- 98 when there was a big onion scam. The people of Delhi, who are used to eating onion with almost everything, suddenly found onions replaced with radish or what is popularly known as mooli. The shortage of onions for the aam aadmi caused hardships for the ruling government in Delhi and Sheila Dixit could make a comeback. Onions rotting in godowns due to procedural lapses was the story a decade ago and tragically continues even till date.
Like I mentioned above, 2010 was truly the year of Golmaal. What started unsportingly with IPL continued with Raadia tapes becoming public and how can one forget the Common Wealth Game scams which revealed the extent of corruption that can take place for an event which was to showcase India in better light. The frustration of people was more than evident recently when we were playing “what’s the good word” with a few family friends and their children. The word given to a team of children was corruption. Little wonder the child gave a clue politician and immediately his partner answered correctly. My guess was statesman, which was way off target.
Analyzing the year, which has gone by is always easier than projecting and forecasting the future. Notwithstanding the optimistic voices in the media about a good run for the market, I somehow feel the market is very tired at these levels. A rally could come in the run-up to the budget or maybe if the JFM (Jan-Feb-March) quarter does well. That rally could surpass the previous peak. However, after that it will take a confluence of positive events to keep the indices healthy and higher. Interest rates are slowly and steadily increasing. Fixed deposit rates are inching higher and lending rates understandably are also firming. Liquidity remains tight. The era of easy liquidity is nowhere visible in the near horizon.
The other worry is that of inflation. High inflations has a lot to do with the logistics and supply side mismatches, which cannot be cured overnight. High inflation is here to stay unless the base effect comes to play. Most central bank governors find high interest rate as a tool to curtail inflation.
Remember, in the current environment, inflation is exported into India from other countries especially China. Hence, domestic policy can have limited control especially when goods and services are very very mobile. In all emerging markets, liquidity and foreign inflows have been very high. If you look at India, the two major sources of domestic security like domestic insurance and domestic mutual funds have their own set of problems. These again will not move away overnight. Last year, the Dow Jones gave returns of 14% compared to India’s 17%. With the US economy picking up, expectations are that the Dow Jones will give good returns. The theory on Wall Street is that the third year of a newly-elected President brings a good run on the bourses. If the bulls on Wall Street say Yes We Can, it will be hard to imagine a lot of money flowing into emerging markets. Making money was never easy but this year it just seems even more difficult.
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