Money Matters : 2014 - A New Beginning To A Resurgent India
On Feb 25, 2014
A perfect storm has swept across India, albeit an economic one, in the last 18 months. The political lightning and thunder in the foreground has added many hues to a tumultuous year that just passed by. Newspaper headlines present a stark image of de-growth in almost all sectors. But between the dark clouds there are rays of hope. It does not matter what happens in the election. It does not matter if there is no AAP revolution. It does not matter if politicians don’t realise their karma and dharma and serve the people. The year 2014 will lay the foundation for the next unprecedented economic boom we are going to witness. India will grow despite the new government. Whether it is Amma, Didi, Maya, NaMo or RaGa gracing the PM chair, there is no stopping the growth juggernaut. The names are in alphabetic order to demonstrate political neutrality of this article.
I am sure by now you have concluded that I am delusional. But allow me to set out my points.
The world economy has been down ever since the 2008 crisis. Instead of a purposeful and enduring solution to the mess, central banks across the world resorted to wanton printing of money. The predicted financial armageddon and consequent end of the world scenarios have since wilted out. The world economy has limped out of ICU. It is still in the hospital ward but the prognosis does have a silver lining.
The US and Europe are the main drivers of the world economy. They keep the humongous manufacturing units in China humming. When China hums, raw material giants like Australia, Brazil and Africa dance along by supplying metals and minerals. IT companies, BPO Centers and Textile companies in Asia will reboot to drive the next wave of consumerism in the western world. The trickledown effect will boost most of the economies around the world.
Employment growth which had reached a nadir has bounced back in the US and is showing signs of improvement in most of the European countries. Banks are in much better shape across the developed countries propped up by their central banks. The hangman’s noose on the Euro has since become a halo around it.
There is every sign that the Indian economy has bottomed out. Coal and Natural Gas production have stabilized and are likely to go up. The Power sector will see much better times ahead. Industrial production is still lagging but appears to have stabilized. The quarterly results which came in for the October –December 2013 quarter were better than expected. There is some stress in PSU banks but the government seems to be providing adequate capitalization to bail them out of trouble.
The domestic consumption story may have taken a hit due to surging inflation but India has huge potential due to its demographic advantage - 47 % of the population of India is less than 25 years. About 130 million, roughly the size of the population of the USA or Euro Zone are between ages 15-24. Assuming that 40 % of them fall in the middle to upper middle income group you are looking at a market the size of France or UK; an army of restless young potential customers, a magnet for foreign companies that bring in hoards of investment. All it needs is a change in perception. This is just what is going to happen in 2015 when the cycle turns and when our GDP tops 6 % again.
Global tensions were really on a hair-trigger in the past two years. Afghanistan, Iraq, Iran, Syria, Libya, North Korea are all but forgotten. Except for a few differences on the South China Sea the world is at peace as the US has taken a step back. This step back has increased the internal strife and suffering in countries like Afghanistan, Syria and Iraq, but it has reduced the chances of any global conflicts. The most important take away of this is a stable or declining crude price. This will help us reign in our current account deficit, subsidies and fiscal deficit and ultimately inflation.
Many experts in the developing countries had put forth the idea of decoupling and how the BRICS did not need the developed nations. This has been comprehensively proven wrong by what has happened on the ground. It will take maybe another decade for the developing nations to catch up. Only when wages increase substantially and disparity is reduced will we have true decoupling. The Asian and to a great extent, the Indian resurgence will be driven by a revival of growth in the US and Europe.
So what does it all mean for investors? In a boom all asset prices rise. The stock market will be the biggest beneficiary when the good times return. Some of you may have a question in mind. Aren’t we already in a bubble? It is again a matter of perception. The last time when the BSE Sensex was at 20,000 in December 2007, the corresponding PE (price to earnings) ratio was 26.9 and now 6 years and 2 months later the PE ratio is only 16.7 with the BSE Sensex at 20,500. If we were in a bubble situation, like in Dec 2007, then with the current earnings and a PE of 26.9 the BSE Sensex would have to be about 33,000 points! Do you see the potential of madness?
A point to note is that many of the companies have not had any drastic fall in revenues or profit. There are many well managed companies that will see substantial increase in valuation once the sentiment turns positive. Those of you who had not taken advantage of the low prices in 2013 should pick and choose good companies to invest in 2014. Real Estate will take some more time to come back to the lime light due to excess inventory, but come what may they will continue their rise from 2015 but at a saner pace. Gold may not increase much in the medium term. When global confidence improves investment in safe haven assets always sees a decrease. Silver is likely to see better days as it has industrial uses.
I believe the situation to be volatile till September 2014. Economic data will start to look good from the last quarter of 2014. Once this happens, the business confidence will turn optimistic. This will provide an impetus for capital investment business groups and foreign companies and by mid 2015 we will be ready to really take off. So fasten your seatbelts and start investing. When the world becomes mad again laugh your way to the bank.
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