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The Dirty Picture

By Sunil Damania | 12/16/2011 5:51 PM Friday

The title has nothing to do with the latest movie starring Vidya Balan, but I have used it with reference to our economic scenario of 2011. India experienced the worst paralysis on political decision making, with no major reforms pushed ahead. The economic conditions went from good to bad, with the rate of interest surging higher, resulting in abnormally higher cost of borrowings. The principal casualty of this was business confidence and economic growth.

On the other hand, almost all IPOs resulted in huge wealth destruction for investors, driving them further away. This was a sad case for them, as they were looking for reasons to remain invested in the stock market. There was a time when people were predicting that the rupee would appreciate against the dollar. But today, the rupee is at an all-time low against the dollar, having depreciated by as much as 18 per cent in the last 12 months. Indian stock indices, on other hand, are finding themselves placed amongst the worst-performing stock markets in the world in 2011, having declined by 21 per cent. This makes the picture quite dirty. While the picture as visible from the rear view mirror is quite dirty, that seen from the windshield is not rosy either.

The Indian economy is slowing down, and even the government is admitting this now. What needs to be argued is the quantum by which the Indian economy would shrink going forward. Our sense is that India may not even report a seven per cent GDP growth rate for FY 2012. What the scenario on the GDP front for FY2013 would be is anybody’s guess, and everything depends on how the government is able to put its house in order.

The government is facing a huge crisis by courting one problem after another (at times troubles invited by them on their own), taking away from the focus of putting the economy back on the growth path. So, unless the government becomes active on the economic front, one should not expect healthy numbers for the economy even in the next year. Political stability (or rather instability) would also play a very important role in the next 12 months, impacting market sentiment. In addition, we expect some bad news from the Chinese economy in the next 12 months, which is likely to mar global sentiments.

So, what should one do in 2012? We had rightly predicted last year that the year 2011 would be a challenging one. Let me reproduce what we stated same time last year in this very column: “It may not prove to be a great year for the stock market….The surging rate of interest is the biggest danger that the stock market is facing as it would impact the demand as well as the earnings of India Inc.”. For the year 2012 too, we are not very optimistic. The Indian stock market continues to trade at rich valuations of 17.20x (trailing 12 months). These are absolutely rich valuations, with growth hardly visible in corporate earnings. So, play your cards cautiously.

As a part of an annual feature, this time too, our cover story looks at various assets classes to give some sense of what is in store for the next 12 months. Our research team has constructed a Rs 10 lakh portfolio, keeping in mind the challenging times ahead. However, since we don’t expect the markets to move up in a hurry, we advise our readers to buy the recommended scrips in a staggered manner (in the same weightage), instead of rushing to buy at one go.

Before I conclude the edit for this special issue, the entire team at the Dalal Street investment Journal joins me in wishing everyone a Merry Christmas and a very Happy and Prosperous 2012.

Read More: Volume 27 Issue 1

 

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