During the Christmas week, a text message hopped from mobile phone to mobile phone pretty much saying one would have made more money in 2010 by investing in onions than in equity shares, fixed deposits, real estate, or in any other asset class. And how true it was!
From its normal price of less than Rs. 10 a kilogram at the start of the year, the favourite vegetable of the Indian poor zoomed to Rs. 80 by late December before the government stepped in and brought it back to Rs. 40 levels. If you had figured out a way to preserve onions for a year, you could have made anywhere between 300 percent and 700 percent profit, depending on when you sold. Compared to this, the equity markets gave a mere 16 percent and the deposit rates rarely crossed 8 percent. Real estate prices failed to breach the 18 percent mark even in the hottest markets.
Building wealth through onions is indeed a fantasy. But the price rise wasn’t. It was rudely symbolic of the price India has begun to pay for fast growth. Rising food demand has made inflation the norm rather than the exception; the country is vulnerable to commodity supply shocks. Prices of assets are back to historical highs taking them beyond the reach of many. Interest rates have not stopped going up. The costs of doing business are rising. Political stability has come under question with a wave of scandals and a Parliamentary logjam. The vicissitudes of the global economy — especially the US and China — have begun to tell more sharply on India’s financial markets.
“The way a mix of signals is emerging, the threat of a slowdown in the economy is a very real possibility in 2011,” says Abheek Barua, chief economist of HDFC Bank. “I won’t agree with this notion that the India growth story is entirely OK.”
It is this challenging climate that the investor is walking into in the New Year. Making sense of the financial markets has become increasingly difficult in recent years due to higher complexity and volatility. It will be even more so in the New Year as a myriad of global and domestic factors send conflicting signals about what to expect.
The Wild West Factor
It was as if Santa Claus had taken a special interest in reviving the US economy this Christmas. The world’s largest economy had indeed posted impressive numbers in the previous couple of quarters, but a decisive signal about the return of consumer demand proved elusive.
In the weeks running up to Christmas, economists pointed out that unemployment was still a high 9.8 percent and consumers had not begun to spend. They reasoned any growth was coming from abundant liquidity and failed to touch most Americans.
But the holiday shopping season put that speculation to rest. Pre-Christmas sales in 2010 reached a brisk $584 billion, a figure even higher than the pre-crisis 2007 sales. MasterCard revealed that retail spending rose 5.5 percent in the 50 days to Christmas. Online sales grew 15 percent. And nearly half of US customers said they would shop in the week before New Year. All signs that the US economic recovery is getting more entrenched.
“I do think that in 2011 we will see shift of leadership in the global economy back to the other side of Atlantic,” says Suman K. Bery, director general of the National Council for Applied Economic Research (NCAER). He says two decisions of the Obama Administration — one to extend George Bush era tax breaks and the other to infuse as much as $600 billion through the second tranche of quantitative easing — are boosting consumer demand and confidence.
It is terrific news for America, for the world and to some extent, Indian companies serving US customers. But it could actually bad news for the Indian investor. Why?
If the US becomes good to invest in again, portfolio investors looking for quick returns will have less incentive to send money to emerging markets such as India.
In fact, the bounce-back in the Indian stock markets since March 2009 happened largely due to such inflows from America. The first installment of money infusion leaked out of the US because investors didn’t see much potential in a job-losing economy. Some of that money came to India.
The Valuation Pain
(This story appears in the 14 January, 2011 issue of Forbes India. To visit our Archives, click here.)