Lawrence Summers, the former US Treasury Secretary commented last week that once again Europe’s effort to contain its crisis have fallen short.  Global debate on austerity vs. growth is finally showing signs of conclusion with clear indication that austerity in the face of depression has only made the depression worse.  Unfortunately, inspite of the end of this debate in favour of growth, there seems to be little prospect of near term course correction either in Europe or in US.  Complete conviction on Keynesian Doctrine is absent and half baked measures for liquidity enhancement are not yielding necessary results.

April was ugly for the International Markets.  The UK officially slipped into a double-dip recession.  US data showed weaker growth than hoped for and an apparent stalling in the improvement of the jobs picture.  The eurozone crisis deepened as Standard & Poor’s downgraded Spain’s debt.  Yet stock markets survived relatively unscathed.  The residual liquidity still available in the global markets ensured that markets held on inspite of negative news flows.  However, it’s more than clear that the anemic growth seen in the past few months is now a thing of the past.

Asian markets including China have also seen significant deceleration, leading to concerns regarding overall world economic health.  All these economic headwinds do not augur well for the Indian capital markets.  During the first three months of the current calendar year, Indian capital markets remained buoyant on the back of continuous buying by FIIs.  The trend got reversed in April.  Apart from the global headwinds, domestic factors also contributed to this reversal. Deteriorating fiscal position including increasing capital and current account deficits have rung warning bell for Indian capital markets.  Depreciating rupee coupled with complete policy paralysis at the government level, has frustrated the foreign investors.  Though fundamentally not very significant, retrospective changes in taxation rules have also worsened sentiments.

All of the above negative macro factors on top of worsening corporate performances, on account of shrinking demand, high inflation and high interest cost of funds have led to deteriorating fundamentals in the market.  It is extremely unlikely that the fundamentals will improve in the short term.  It is also unlikely that the global economic crisis will get over in the next three to six months.  Under the circumstances, the overall capital market outlook for India in the next six months is unfortunately bearish.  Expected good monsoon and fresh liquidity injection in global markets will only arrest further downslide of the index.  Positive triggers for facilitating a breakout from current levels are sadly missing.

However, there will continue to remain pockets of out-performance and select sectors like FMCG and Pharmaceutical will out-perform the markets.  Valuation will continue to be clobbered by growth.  Picking stocks that look cheap relative to their own fundamentals will not work in the short to medium term.  Growth investing, involving looking for companies whose profits are growing even if they are expensive, will provide better returns.

During the next few months, domestic capital market triggers will come from the following :-

1. Progress, performance and distribution of monsoon rains

2. Domestic inflation

3. Cost of funds

4. Q4 FY12 and Q1 FY13 corporate results

While the current expectations around the monsoon are positive, concerns remain regarding inflation and consequently interest rates.  Corporate performance can get significantly impacted if interest rates do not come down over the next few months.  While the RBI has recently carried out 50 basis points cut in interest rate to bring back economy on the path of growth, further reduction interest rate is warranted.

The global trigger effecting capital markets will primarily be the following :

1. Global liquidity situation and consequent appetite for “risk on” trade

2. Economic situation in Spain and Italy particularly with respect to refinancing their debt

3. Progress of US economic recovery

While concerns remain regarding Spain and Italy and even the pace of US economic recovery, global liquidity situation is expected to remain extremely favourable.  This will ensure flow of FII investments into India leading to buoyancy in Indian capital markets.

Retail investors have been absent from domestic capital markets for sometime and even now level of retail interest is very low.  Volatility and index fluctuation will continue but scope for significant capital appreciation continues to remain in Indian capital markets.  The strategy needs to be sector specific and stock specific.  Blindly buying the index or sectors will not yield the desired results.  The investor needs to carefully analyse and pick up appropriately priced stocks for capital appreciation.

Amongst sectors both Pharmaceutical and FMCG present attractive opportunities on a stock specific basis.  Bigger pharma companies involved in drug discoveries, seeking approval for marketing drugs in US and Europe are subject to significant price volatility due to uncertainty around their business model.  However, companies focused on domestic markets or involved in contract manufacturing are largely immune to this volatility.  Considering the significant cost advantage and available skill sets of domestic manpower, midcap Indian pharma companies are attractive manufacturing and R&D partners for global pharma majors.  M&A opportunity in this sector is also significant. Domestic pharma companies focused on CRM have siginificant upside potential even at current level.  Companies like Divis Laboratories, IPCA Laboratories etc. present attractive opportunities.  Select FMCG stocks also may offer capital appreciation even from current levels.

Keeping in mind the recent interest rate reduction by RBI, few interest sensitive sectors like Banking and Automobiles provide opportunities on a stock specific basis. In the automobile space both Maruti and Tata Motors look attractive at current valuation.  While Tata Motors hve significantly appreciated over the last few months, Maruti may move up significantly from current levels.  Recent launch of their SUV should enable them garner market share in the hitherto untapped segment which constitute around 15% of the total automobile sales.  Apart from this, the production blockage suffered by the company during the last fiscal are not expected to recur during the current year.  This will ensure normal volume growth in the existing product basket apart from incremental share gain in the SUV segment.

In the banking space, select private sector banks like ICICI look attractive.  The asset quality and NIMs are excellent.  With RBI reducing interest rates both NIM and asset quality are expected to further improve.

As a sector though Fertilizer has been under-performing, investors can look at GSFC at current levels considering the strong fundamentals.  While the policy environment is yet to improve, input constraints suffered have by and large been addressed.  Significant cash reserves and low valuation make this company extremely attractive at current valuations.

Investors have different options to invest their money and every option comes with its own related risks and rewards. While investing in equity has a higher risk and higher return proposition, investing in debt has assurance of return but gains are modest.

In a globally integrated economy, return on investments depends on the risk appetite. Any fixed or guaranteed return instrument provides very low return which may or may not even cover inflation. Thus, deployment of savings in such instruments will surely fail to meet the objective of wealth creation. On the other hand, investments in the real economy i.e. in performing businesses directly or in them through the share markets can surely beat inflation and generate significant wealth. In an economy like what India is today, i.e. growing at a pace of 8-9% per annum, with inflation hovering around 7-8% the average nominal return by investing in shares of companies should be around 15% (i.e. average GDP growth + average inflation). Calibrated selection of stock portfolios can obviously enhance this return significantly and generate great wealth. The billionaires of today are shareholders of well performing corporations, whether  owners / promoters or not. It is also apparent from the performance track record of equity markets that over long period of time, equity investments beat all other investments in terms of returns.

Being afraid of equity investments because of risk is not the solution, managing the risk and taking it to the least possible level acceptable, is. The equity markets are no longer the exclusive realm of the skilled risk takers. With increasing income levels, handsome returns and booming index, only a few dare to shy away from the markets. Even investors with low risk appetite, hold a share of the equity markets through their balanced or equity mutual fund holdings. In order to beat inflation, some financial advisors recommend that even the retired individuals should lock a portion of their investments in equity.Understanding that risk and uncertainty are the key factors that propels the return on investment in the stock market far beyond the returns of Passbook Savings Accounts, CD’s or Bonds. Key factor would be to use the risk and uncertainty of a stock market security to our advantage.

A well-planned investment strategy begins with a proper asset allocation plan. This is the first step to wealth creation. Asset allocation refers to spreading investments among different asset classes. Since the performance of different asset class is different and reacts differently to market conditions, it significantly reduces your portfolio’s volatility. Holding a diverse range of assets is important because it spreads your risk by reducing your dependence on the performance of one particular asset class – a positive performance in one area will offset periods of weakness in other investments. As well as diversifying across asset classes, you can diversify within each asset class – spreading your risk even further. Within Australian shares, for example, instead of just focusing on banking stocks you could also invest in resources stocks or infrastructure assets. As well as big ‘blue-chip’ stocks you could look at ’small-cap’ investments in smaller businesses with lower market capitalisations.

The rapid development of Indian economy over the last few years and the expected continuation of this growth momentum over the next 5-10 years present an unique opportunity which may not exist once the economy matures and the rate of growth slows down. Our generation is in fact blessed with this unique wealth creation possibility through sensible stock market investing.

Transforming agricultural systems is essential for inclusive growth, and should draw upon the experiences of nations like Indonesia and China which have successfully accomplished this. Over the last 25 years, India has not invested enough in raising agricultural productivity.  As the largest investor in agriculture, the government sells seeds, fertilizer, water and extension services to farmers and also buys their products.  But the government’s investments have focused on subsidizing rather than developing agriculture, and this has been the biggest obstacle to food security in India.  For instance, the government has provided heavy discounts through the Food Corporation of India (IFCI) to make rice more affordable rather than investing in breakthrough rice hybrids, which raise productivity and lower prices.  In 2008-09, the government invested $2.27 billion in infrastructure for agriculture (markets, roads, and so on) but spent 15 times that amount ($37.5 billion) on fertilizer and food subsidies.

Fertilizer, water and electricity (used for pumping water) are subsidized in ways that lead to significant waster, as well as to poor choices of crops.  There is insufficient investment in irrigation infrastructure and irrigation techniques, development of new crop varieties, innovation in farming methods and in diffusing what knowledge already exists.  On the financial side, credit is not provided efficiently, nor coupled with insurance against crop failures.  Mechanisms for selling crops are costly and subject to the control of powerful intermediaries.  Storage, transportation and distributions of many agricultural products are still primitive, because of lack of government investment, and failures to enable private investment in areas where it could be financially viable.

A holistic response, like the one for Punjab in the 1960s, bringing together water, seeds, extension services and the market through the FCI doubled the per hectare productivity of wheat in five years.  Similar success was reached with rice in Thanjavur.  But since then India’s green revolution has taken a long pause.  Agriculture-intensive states such as Uttar Pradesh, Bihar, West Bengal and Orissa, which have the potential to double their farm yields simply by applying known and existing technology effectively, are yet to benefit from such a concerted effort.  Going beyond increasing output, linking the farm to markets more efficiently to reduce waste and matching output to market needs can play a pivotal role in increasing the incomes of farmers.

Our aim of achieving inclusive growth and double digit GDP growth hinges critically on refocusing on Agriculture in the right manner. The ambitious target for growth in Agriculture for fiscal 2011-12 can act as the right catalyst for initiating this process.

As a country we are at crossroads and its upto us to make our destiny. The robust GDP growth needs to be truly supplemented by an inclusive growth. This needs to move beyond rhetoric and lip service. The danger lopsided growth poses needs to be understood in the context of social stability and acted upon without any further delay.

Considering the momentum gathered by the last few years growth India can surely attain next level of economic development soon subject to prudent economic management and completion of the long pending task of enacting the requisite legislations for speeding up and removing the impediments to growth. We need a functioning parliament and a national consensus on economic growth. We need quick and exemplary punishment for scamsters which will act as deterrant.

Indian capital markets should prosper in 2011 subject to the above referred governance issues being fixed at the earliest and also satisfactory outcome in certain other key areas like monsoon and crude oil prices.  In spite of all the developments, Indian economy continues to be dependent, to a great extent, on rain Gods.  Monsoon needs to be good and appropriately distributed.  This will result in continuance of agricultural growth and prosperity in rural India.  Good monsoon also has a positive impact on domestic inflation.

After Monsoon, second most important factor for  Indian capital markets continues to be international crude oil prices.  This needs to remain below $100 per barrel to ensure that inflation is under control.

Our expectation is that over next 3-6 months, crude oil prices will start coming down and stabilizes at around $90 per barrel.  Along with this, if the rain Gods are smiling on India, rapid growth of Indian economy and capital markets is a foregone conclusion.  The Central Government has also started showing signs of taking appropriate remedial measures to fix the governance issues.

Investors with a time horizon of one year plus should treat current softness of India capital market as a great opportunity for value buying.  Continued strong domestic demand and even a marginal recovery in international demand will propel Indian corporates to deliver 20-25% growth in earnings in 2011.

Looking forward to a great 2011 where India will regain its true position in the comity of nations.

As a country we are at crossroads and its upto us to make our destiny. The robust GDP growth needs to be truly supplemented by an inclusive growth. This needs to move beyond rhetoric and lip service. The danger lopsided growth poses needs to be understood in the context of social stability and acted upon without any further delay.
Considering the momentum gathered by the last few years growth India can surely attain next level of economic development soon subject to prudent economic management and completion of the long pending task of enacting the requisite legislations for speeding up and removing the impediments to growth. We need a functioning parliament and a national consensus on economic growth. We need quick and exemplary punishment for scamsters which will act as deterrant.
Indian capital markets should prosper in 2011 subject to the above referred governance issues being fixed at the earliest and also satisfactory outcome in certain other key areas like monsoon and crude oil prices.  In spite of all the developments, Indian economy continues to be dependent, to a great extent, on rain Gods.  Monsoon needs to be good and appropriately distributed.  This will result in continuance of agricultural growth and prosperity in rural India.  Good monsoon also has a positive impact on domestic inflation.

After Monsoon, second most important factor for  Indian capital markets continues to be international crude oil prices.  This needs to remain below $100 per barrel to ensure that inflation is under control.

Our expectation is that over next 3-6 months, crude oil prices will start coming down and stabilizes at around $90 per barrel.  Along with this, if the rain Gods are smiling on India, rapid growth of Indian economy and capital markets is a foregone conclusion.  The Central Government has also started showing signs of taking appropriate remedial measures to fix the governance issues.

Investors with a time horizon of one year plus should treat current softness of India capital market as a great opportunity for value buying.  Continued strong domestic demand and even a marginal recovery in international demand will propel Indian corporates to deliver 20-25% growth in earnings in 2011.

Looking forward to a great 2011 where India will regain its true position in the comity of nations.

Central banks started building up their stocks of gold from the 1880s, during the period of the classical gold standard. Under that system, for countries on the gold standard, the amount of money in circulation was linked to the country’s gold stock, and paper money was convertible into gold at a fixed price. The development of banking and credit meant that the amount of money in circulation was greater than the gold stock itself, but everybody had sufficient confidence in convertibility that there was no danger of this option actually being exercised. That at least was the case during the height of the gold standard for the UK, the then dominant economic, political and financial power. As other countries decided to join the gold standard, they also started to accumulate gold so as to be able to maintain convertibility at a fixed price.

Central banks, and official international institutions, have been major holders of gold for more than 100 years and are expected to retain large stocks in future. They currently account for about 20% of above-ground stocks. The process of rebalancing reserve portfolios to adjust to changing conditions has led to a reduction in the amount of gold held by some central banks recently.

As financial markets developed rapidly during the 1980s and 1990s, gold receded into the background and many investors lost touch with this asset of last resort. Recent years have seen a striking increase in investor interest in gold. While a sustained price rally, underpinned by the fact that demand consistently outstrips supply, is clearly a positive factor in this resurgence, there are many reasons why people and institutions around the world are once again investing in gold.

Once of interest mainly to central bankers, Swiss jewelers, and Indian ladies, gold is now the world’s “it” investment. At department stores in London, you can pick up a 27-pound gold bar along with a sweater and bed linens. Gold is sold like candy out of train station vending machines in Germany. Indian households are borrowing against jewelry the way Americans did not so long ago against their homes. And U.S. investors poured $15 billion into gold funds in 2009, as they were pulling money out of stock portfolios.

Philip Klapwijk, Chairman of GFMS, the London based independent metal research consultancy, while speaking in London providing first update of gold survey of 2010 ,mentioned last week that gold prices are likely to touch $1300 before the end of this calendar year. Exponential rise in gold prices over the last couple of years and the possibility of a continued rally even in the near future is probably one of the most intriguing fallouts of the international economic crisis.

Rising investment demand is the prime driver in the rally of gold prices during the year. Gold lived upto its reputation as a safe haven in troubled times.  Investor interest explosion in gold followed the sovereign debt crises in Europe.  Other factors including shaky outlook for the industrialised world’s economies, low interest rates and feared threats of inflation stoked investors’ interest.  Experts believe that the key to the ongoing price strength of gold is also the extraordinary monetary and fiscal policies being enacted by the industrialised world’s governments in the face of sluggish economic growth, the spectre of a double-dip recession and already uncomfortably high unemployment.

US is almost certain to re-start “Quantitative Easing” relatively soon and UK is likely to follow.  Somewhere along the line European bank will also fall in line.  This might not make much difference to consumer prices, but will surely undermine the value of the paper currency making gold a pretty good alternative currency.

Post the International Economic Crisis, Central Banks across the world have started buying gold.  China, India and Saudi Arabia have announced large addition of gold to their reserves since the start of international financial crises in 2008 providing psychological boost to the gold prices.  Even though buying of the Central Banks on an overall basis remain relatively low, the shift in policy, stands as an important departure from the past decade when Central Banks sold on a average of 442 tons of gold per year which is equal to about 10% of the total world bullion demand.

In the very short term, the gold price may shoot up by Rs.1000/- per gram from the current level and reach its peak in the forthcoming festive season.  In the long term, investment demand in gold will overtake the traditional jewelry demand.  This investment demand will come from across the globe and one can very comfortably remain bullish in gold even for the long term.

With urban young generation having fancy for diamond and artificial jewelry, gold jewelry demand as a percentage of gold consumption will come down in future.  However, gold investment products will become very large.

Fashion Jewellery has little or no store value. Gold Jewllery was always also bought for store value of Gold. Recent studies/surveys suggest a clear shift in the consumption pattern in India and the projections are as below:

Considering all of the above, gold buying and accumulation at all levels can be recommended as a long term financial strategy.  Of course while buying gold, one needs to focus on the investment products that are reasonably priced.  One should minimize investment in jewelry from financial investment point of view, and acquire certified gold bars which are available with a small loading of 1-2 %.  Branded bars have much higher loading on the basic gold price.

In his brilliant book, “The Hungry Tide”, Amitav Ghosh explores the fascinating delta of Sunderbans in West Bengal and unfolds the mystical quality of life and natural beauty of this area.  The elite population of the world, post this work of Ghosh, is now aware of the beauty of Sunderbans which is undeniably captivating.  However, the quality of life for the poor residents of this corner of the country continues to remain pathetic.  There has been no development whatsoever for the past 100 years and all proposals for development of tourism in this area have been scuttled by concerned environmentalists not willing to disturb the fragile eco-system of the area.

May be its time to pause and ponder over the impact of our environmental crusade on the lives of poor tribals and residents of places like Sunderbans.  Are we morally and ethically correct in preventing development in the under-developed areas in the name of environment.

Yes the tribals need to be consulted on how exploitation of mineral resource is planned, but by allowing environmentalists to prevent exploitation of mineral resources or travel and tourism development in backward areas we are ensuring that these pockets remain green without becoming rich.  We are imposing environmental standards on backward areas without considering whether the trade-off is in favour of the local population. At our level of development, are we ready for these luxuries?  We need to probably work towards increase of per capita income in these remote under developed areas before beginning to attach such premium to environment. Environmental cost needs to be weighed against the Social and Economic cost of underdevelopment of a vast area of the country.