Tuesday, December 29, 2015

Which Way Will the Indian Economy Go in 2016?

Predicting anything about the future is never easy and always full of uncertainties.

At the start of 2015, it was predicted by many experts that 2015 will be a great year for the Indian economy. The predictions talked about stock market touching new highs by the end of 2015. One of the reasons often cited was that there was a new, pro-reforms Government at the Centre with inspiring leadership at the helm. Despite that, not much did actually happen due to several reasons.

The BSE index did go up to a new high of 30000 during the year but then as it looks like, a few days before the year will come to an end, stock market at the end of 2015 will close lower than where it was at the start of the year.

The expectations of US Fed rate hike in 2015 did finally come about. There was a lot of see-saw the market went through but in the end the US Fed did bite the bullet.

Expectations of interest rates in India lowering also came about. The decline in interest rate in 2015 has been quite dramatic. In overall terms, the decline has been close to 1.5% to 2% (9%-9.5%  rates changing to 7%-7.5%) which is quite steep. That made investments into PPF, SSC, SSY, and various tax-free bonds that were announced this year a lucrative option.

It is believed that over the long run (typically 10 years or more) equities deliver higher returns though in certain years the returns can be negative. 2015 was one such year.

In the Indian context, real estate continues to stagnate and those who invested in real estate not only made net negative returns but remained saddled with properties that are still difficult to dispose of. In the current market, there are only sellers. Buyers are still waiting as they expect further market correction.

Gold and commodities had a very bad year in 2015. The mining and metals sector lost market capitalization across all global markets. The decline in oil prices has been too steep that it looks almost inconceivable that such a thing could even happen. When oil had reached 100 dollars per gallon few years back, it looked as if 150-200 dollars is not far away. No one including the experts predicted its fall in this manner.

So sitting at the fag end of 2015, what can be said about which way will the Indian economy go in 2016? Here are some thoughts to chew upon:
  • No one can predict the future, not even the experts. The difference between a layman and an expert is simply that the expert can employ a good amount of jugglery and jargon to sound convincing.
  • The world had become a much more volatile place. The markets can swing a lot rapidly in either direction in a short span of time.
  • The world markets are tightly integrated now. Most of the local events are analyzed (or rather over-analyzed) by various global players in no time and the impact cascaded across the global markets.
  • With machine-based, algorithmic trading becoming the way with all institutional and HNI investors, volatility is here to stay.
So which way will the BSE index head towards in 2016? Upwards or downwards? Will the bloodbath in commodities and oil continue? Will gold prices go up or down? Which sectors of the economy will rise and which will fall? Which new sunrise sectors and companies emerge? These are questions for which no one can offer any definitive answer.

In all this confusion and a situation where excessive information is getting generated, the fundamentals will still continue to matter (as the value investors would comment). Unfortunately, the fundamentals also change now with high uncertainty.

Oil is probably the best example. Knowing that it is a non-renewable, finite natural resource which will continue to have high demand and with the cost of production going up every year, one would expect oil prices to go in only direction - up. This hasn't happened though. It's clear that speculation and self-serving interests of the big players and global political considerations are driving oil prices and not just economics.

In summary, it is not important to even predict which way the economy and market will go in 2016. It is much better to maintain a diversified portfolio (debt out-performed equities hands-down in 2015), keep a close eye on global political and economic developments, switch investing style based on need of the situation (from a day trader to a seasonal speculator to a long-term investor), and last but not the least use fundamental analysis to pick the right investments to start with. This would help to protect the down-side risk and allow one to get good returns coming out of volatility that would continue to prevail upon the markets in 2016 and very likely beyond that as well.

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