Happy New Year 2015
Broad predictions for world wide changes
Broad predictions for world wide changes
Science:
My predictions for 2013 seem to have been ahead of their
time, because while nothing much happened by Dec 2013, by Dec 2014 a lot of
these anticipated technologies have in fact come true. So its worth looking in
some detail.
My prediction for no fresh changes in physics for next 50
years, made after discovery of Higgs boson, has fortunately been overturned by
the radical new mathematics in multidimensional symmetries, further work on
dark matter and dark energy and the possibility that the Higgs boson might have
been an artifact after all. Significant work on new possibilities have emerged
in 2013 and 2014, making it likely (25% chance) that by 2025 i.e. just 10 years and much
before 2050 which I had earlier predicted, we will have completely new understanding
of physics and cosmology which will change life forever. The number of planets
detected by Kepler has exponentially increased the chances of contact with
extraterrestrial life within next 50 years, initiated by human exploration
rather than the other way round. Which might be within the lifetime of some
people here (though not me!)
On computer technology, the role of increasing automation of
processes reducing the need for human interface to make software work is
increasingly removing mid level jobs. So we are going to have well paid
innovators and low level tech support
jobs with fewer jobs in between – killing a lot of business models. It will
again increase the distance between rich and poor. 2014 saw major work on
virtual reality with many products reaching the developer market and I am
reiterating my prediction for a change of gaming to immersive virtual reality
by 2020 – and possible shift of movies into virtual reality mode by 2025.
2014 finally saw a lot of alternative energy sources coming
with reducing costs. The oil at 100+ prices scenario gave an impetus to not
only fracking (a most destructive and horrible oil binge on looting the
environment) but also in solar and other accumulator technology. Paradoxically
it is battery technology which has benefitted the most. Methods of increasing
the storage capacity of batteries are
progressing (finally!) the way processing speeds of chips progressed before.
The imbalance in technology focus has been corrected. Battery size reduction
and charging speed increases are phenomenal and in near future i.e. before 2020
will affect the personal transport equations. Battery operated vehicles will
increase in the richer parts of the world exponentially – despite the recent
fall in oil prices threatening to cause a resurgence in fuel guzzling cars. I
reiterate my prediction of no change in combustion cars but change my
prediction to battery operated and hybrid cars – these are falling in price and
along with solar technology which fell a lot in cost over last 2 years – will
be the future.
But it is 3D printing which will change life forever. As I predicted
in 2013 Jan, manufacturing will change forever but the speed of change has been
mindblowing this year. Printing of organs using cell cultures is already moving
into mainstream for lab investigation and so is printing of tools for outerspace
usage – they already exist in 2014. Traditional manufacturing will no longer
give an edge to the countries adopting it – including the make in India
campaign.
The brave new world which is emerging is even more seriously
threatening a split of the “haves” and the “have nots” with serious economic
consequences. The threat of antoglobalization looms – creation of urban
technological hubs where the rich and brilliant people live and the rural
hinterland where the poor live. Singapore, Beijing, Tokyo, Shanghai, Seoul,
London and New York along with other similar cities will become the city of the
haves. Rest of the urban slums will become even worse slums. These tendencies
are a serious threat to India – since our country doesn’t have even one city
with potential. The initial promise of Bangalore and Pune are deteriorating by
the day. Modi has to deliver on his cyber smart cities – because if India fails
to have even one smart city by 2025, the smart people of India would have moved
on to become expats in those cities abroad which deliver a technological edge
that is essential for survival as a “have”. A political class which fails to
recognize these trends – Modi is balanced on a knife edge – is ensuring the
demise of Indian potential. Our smart people who traditionally emigrated but in
the noughties came back or stayed back, will leave for ever. Whole of India can
turn into a have not area – a wasteland from which every smart person will flee
– widening the gulf between the technological super cities and the backward
slum cities. And as the middle class with potential starts fleeing, those left
behind will be further and further removed from the outperforming population of
super cities. Already Singapore and its experiments with eugenics, educational
brilliance, encouragement of talent, investment in brains and state directed
capitalism are a good example of times to come.
Indians need to observe the progress in the next 3 years
very closely because it will determine the future direction of events which
will become inexorable. This is India’s last chance.
Oil economy
This deserves a small section in itself. Oil price has
fallen to 50$. I didn’t see it coming. In the immediate term it indicates a
recession to come. But the linkage of productivity increase to oil price is a
more important indicator. West has stagnated at 40 to 50000$ productivity from
2000 to 2014 despite technological advance, mainly because the price of oil has
been high. After the world war, almost entire increase in productivity has been
fuelled by oil energy and oil as raw material for petrochemicals. From a high of 140 plus for oil in 2008,
despite a fall to sub 50, most of the decade has seen oil around 100$. At this
energy price, possibility of productivity increase is minimal to non existent.
And so it has proved – productivity has not increased in the West in 10 years.
The fall in energy price has however raised the possibility
that the West will increase its productivity. Presence of solar energy in this
mix, at energy price levels compatible with commercial exploitation i.e. grid
electricity prices on par with coal and natural gas – means for the first time
in history, productivity increase without riding on the back of cheap oil has
become possible. Oil economy will be revolutionized. From here on, the price of
oil can only fall – because each year, solar energy and battery storage
technology is pushing the parity with oil towards a lower and lower price for
oil. Same is true for coal as well. While the world has been looking at
fracking – which is an environmentally destructive technology, solar energy has
reached a point where it can solve the problem of electricity generation as
well as personal transportation through battery operated cars.
In 2013, I had not considered that this would be possible so
soon and yet – here we are – it is obvious for all to see – although world will
recognize this only after a year or two because people’s eyes are closed. The
real reason for oil prices to fall is not the speculative shorting by hedge
funds due to the recession in China and the temporary oversupply – that is only
the immediate cause. The long term reason for secular fall in oil is because
the cost of energy from solar is now on par with fossil fuels – and will soon
push down oil prices even more. So over the next 5 years, we will reach oil prices
of sub 30$ to the barrel even if it yoyos a lot in the process. After oil
finishes falling, it will never rise again.
We have seen the last hurrah of Gold and of Oil. Both are
now dead.
Food
What many people fail to account for is that Oil is not just
energy for electricity and transport – it is also needed for food. All
fertilizers are oil based and high oil prices were a big component of food
inflation. Falling prices of oil and its
secular downtrend means that food inflation will no longer be a problem. Oil
will change its nature – from being a fossil fuel, it will change into food
resource. And this implies that food
prices from here on will remain low. Current food production is enough for 30
billion people on earth, although it is mostly feeding a billion cows and
another billion pigs currently. The use of sugarcane for fuel caused serious
stress on food prices some few years ago. Those days are now gone. With
electrification of all developed economies, sugarcane will be useless as fuel
and the Brazilian rainforests already cut down will shift to food crops,
further lowering food prices.
Changing diet trends
with recognition of health problems with high beef and pork diet will see a
global decrease in consumption because the USA and China – both top consumers
of these products – will reduce consumption. Initially this will be balanced
with increase in consumption by India and Africa. But given the current levels
of poverty in both and even allowing for phenomenal growth, they will not be
able to counterbalance decrease in beef consumption in USA and Europe. Pork in
China will likely continue. Trend for meat consumption has been exponentially
increasing from 1960 to 2000. In the last decade it has plateaued. My
prediction is a continuing plateau with slow fall starting in about the time
the present generation of teens turn about 20 i.e. in about 5 years. By 2020,
the global levels would have declined 5% from existing levels. Part of this
prediction is a bet that average Indians and Africans will not increase their
productivity sufficiently to start increasing meat consumption i.e. asymmetric growth
in population distribution of income, despite great increase in total GDP of
these countries.
All of this means that global hunger will be linked only to
administration (or lack of it) because there will be sufficient acreage under
farming to comfortably feed everyone.
USA
Politics – I am
unable to see anything much happening in USA. Democratic local policies will
continue to the best of Obama’s ability.
Economics: Falling
oil is the main indicator for recession along with short term rates higher than
long term rates. Current short term rates are 0 and long term rates about 2.2
%. So as long as US Fed raises rates below the long term rates, i.e. upto 1%,
we are OK, despite oil signaling recession. I expect the Fed to try and raise
rates very very slowly. The last 6 years have had a very deleterious effect on
the consumption habits of the Americans. While the rich 25% are wealthier, the
bottom 75% now has less money, less credit worthiness, less technical abilities
and less earning potential. Globalization is a reality and the lost jobs to
China, India, Eastern Europe Philipines and other countries are now gone for
good. Retraining has been a big effect in these Fed bail out years and has been
broadly effective, but only some 20 to 30% of the population needing to be
retrained succeeded in getting adequate levels of retraining. The 90s and
noughties have had a debilitating effect on children, they have lost a lot of
hard work capabilities which they have only slowly and partially regained. Those
in their 20s, who grew up earlier,
despite retraining, have moved into a poorer earning potential. Added to the
noughties generation, this is a big pool of around a few tens of millions stuck
in permanent poor paying jobs. So retraining worked but not well enough.
In Jan 2013, I had spoken a lot about this – but in Jan
2014, I had downgraded the effects because it seemed as if US growth had
bumbled through. By Jan 2015, my 2013 predictions seem to be coming true more
than 2014 prediction of USA pulling through. I seem to have jumped the gun in
2013. I am shifting back to my 2013 outlook i.e. rich get richer, poor get
poorer, a lot of work gets automated and destroys jobs, there is insufficient
job generation and more and more of altruism makes it difficult for people to
get paid for jobs which others are doing for free. The quality of Wikepedia
keeps improving and will soon make text books redundant within 5 years. All
those publishing and selling jobs gone, all those professors writing books will earn less well, as online
resources eat into their livelihood. Just like all the rock bands shifted from record
sales to live performance, all the professors will depend on teaching rather
than writing.
The slow rise of inflation in USA has gone unnoticed, except
by bloggers. Real estate prices have firmed, despite the low mortgage rates,
and the soft period is probably over, although not much real estate price
inflation so far. But rental inflation has soared – noticed only in
micromarkets where it has happened. The
big new trend in US real estate is likely to be lower cost housing in the
100,000 to 150,000$ bracket.
Consequently, the actual inflation in real estate
will go un-noticed, as people adjust to poorer quality housing and the big middle
class houses of the last decade will slowly start getting luxury tag. Food
inflation for specific items – not the tracked item – has also increased. So
generic milk might have maintained prices, but the brands have raised prices. Overall
people are increasingly shifting down because the premium for brand is becoming
unaffordable. This might be a permanent split in the society of the haves and
have nots and hence business performance of the brands will reflect in stock
performance. The middle class of USA
will split into the generic and the brand able – and business strategies will
need to be tailored.
Not much can be expected from Obama visit to India.
Democrats are anti India while Republicans are more pragmatic – both in love
and hate. I expect USA to adopt a wait and watch mode in view of the Hindu
lunatic behavior exhibited by RSS types in Modi govt.
Specific predictions USA
Stocks slightly higher in the year. Maybe 18000 to 19000
Dow. Stock specific out and underperformances very likely within the broad
index ranges. It is a stock pickers market (unlike the fed fuelled index fund market
of 2008 to 2014
Oil. 50$. I think it might be volatile but will settle
around 50
Gold. 1050 to 1200 range with a downleg when Fed raises
rates.
Bonds. 2-2.5%. Any rise would be good news, but I doubt it.
Real estate: Firm
Where to invest in
USA: REITS 25%. Selected stocks 25%. Emerging market (India, China,
Indonesia) 50%. This is a good time to buy real estate using local mortgage if
living in USA, both for self use and for rental income – if for the latter. Lower
priced (affordable) properties in the 100,000 dollar range would give better rental
yield and easier to find tenants.
For Indians living in India I would recommend
a 5% weight to US markets with exposure to REITs only (Birla Sun Life Global
Real estate fund or if portfolio size is very large HNI type i.e. 20 crore plus,
direct exposure to US REITS)
Europe.
Recession will continue. UK will outperform, Germany will be
OK. Spain and Italy will be in recession. UK I predict a likely scrape through
for Cameron and return of Conservative party. Spain likely to see a fractured
mandate and solid political disruption causing flight of capital. Currencies
will be slowly depreciating against dollar.
Europeans should invest in emerging markets (same as above)
and US Treasuries. Real estate avoid in all including UK and London. Indians
can ignore investment in Europe including in UK real estate.
ASIA
Political situation has changed a lot in Asia. China will be
a 10 trillion economy by 2015 December. That is massive and a 700 billion
dollar growth in one year is unprecedented. Approximately double of Japan and
five times of India. Now that China, Japan and India have stable governments,
we can analyse next 4 years.
China will continue to pressure Japan and India militarily
with bases in Sri Lanka, Chittagong, Gawadar, Maldives, Nepal and Burma. India will be hard pressed by
their efforts. The recent Bangladeshi terror outfits of Burdwan got support
from Indian communists of Bengal who are traitors. An increasing support of
infiltration by Muslim terror from Burma and Bangladesh will continue. Maoists
will also set up camps in the cross border areas of Nepal under Nepali Maoist/Chinese
patronage for drug and arms smuggling, to pressure India. A red corridor has
been set up from Nepal to West Bengal to Maoist infested regions into
Bangladesh, North Eastern states and Burma and this will continue. China will
also set up port infrastructure in Srilanka for their shipping lanes as well as
submarine bases which will link with the bases in Chittagong harbor.
India will be forced to expend a lot of money on its Navy.
Major border events by terrorists will tie up our administration. Our relations
with the above Chinese satellite states in South Asia will deteriorate despite
Modi efforts to engage them. Ideally Modi should keep quiet and only expand
business and shipping with these states. More aggressive posturing should come
after 2-3 years.
China will continue its policy of matching Pakistan’s
capability to exeed India’s military developments. Pakistan will be given
missiles and technology to counter every Indian military advancement. If we
make 300 Km Brahmos, Pakistan gets 700 Km Babur from China. If we make a Agni 6
(an empty boast for now), soon Pakistan will get extended range ballistic
missiles with MITR (Taimur). If we make Nirbhay, already Pak has Babur and RAAD
but might get another counter from China. Pakistan is already out of its league
economically as far as GDP is concerned. With 250 billion in total output,
Pakistan is 1/7th of Indian GDP of 1750 billion. But China grows 3
Pakistans every year and can afford to give almost any weapons Pakistan needs.
The real question now is not which side Pakistan will chose
– it has already chosen China and rejected USA. This was largely imperceptible
but more or less, USA has slowly lost influence within Pakistan for the last 3
years. But Chinese have made up for the US loss and might also make up in terms
of investments and money in future. China Pakistan Axis is now a major thing.
The real question now is which side will Iran choose?
Earlier it was a foregone conclusion that Iran will be with China but now the
possibility of Iran choosing USA is increasing. The opening of the Chabahar
port by India and building of the Turkmenistan to Chabahar pipe and road has
become less relevant for Indian economy with the softening of global fossil fuel
prices. But politically, it is very relevant – it represents the last chance
for Iran coming to the side of the US. If this initiative fails – with falling
oil prices, Iran will find no market for its oil except Pakistan and China. It
will be forced to sell below market prices and a pipeline from Iran and even
Azerbaijan and Turkmenistan to China via the Tibetan/Tarim basin routes might
be the only respite for Iran because falling oil will impoverish and diminish
Iran. With GDP of 350 billion and 25% coming from oil, the falling oil prices
means that Iran GDP will contract by 5 to 10% next year. The only option is to
export more and since it has only 2 customers i.e. India and China, it will
probably opt for a Chinese pipeline long term export plan unless India counters
this with another pipeline to counterbalance and keep it out of permanent Chinese
satellite status – possible only if USA stops wearing blinkers and supports
these initiatives. Support to Assad from Iran will now reduce. But it depends
on China – the future of Syria will be decided by China. Hezbollah funding from
Iran will also dry up and Iranian influence in Iraq will reduce.
Saudi GDP of 750 billion has 45% from oil export. So fall in
oil means GDP contracts 15 to 20%. This is a serious problem – although cost of
production is about 5$ per barrel, the cost including social responsibility
becomes much higher at about 50$ per barrel. Saudi will have reduced influence
on Sunni extremists because of their loss of revenue surplus – at 50$ cost plus
social service breakeven there is no margin left even for Saudi - and their
need to expend money on local population increases by the day. Per capita GDP
will fall from 25000 to 20000$ this year – a serious contraction.
UAE will perform much better than Saudi since only 30% of
GDP is from oil exports. Still, from 420 billion it should fall to 400 billion
or less in 2015. This means that there will be a real estate recession in Dubai
and Abu Dhabi worse than the one already seen in 2014. Already there are ads in
India for UAE property but UAE high handed behavior of troubling people for
permanent resident status has meant that fewer Indians will risk it.
Syria is poised on a knife edge. I predict that Assad will
be bailed out by Iran and China despite US hopes that reduced Russian and
Iranian oil revenue will debilitate Assad. Since Chinese action in geopolitics
is predictable (unlike India), I see China seeking to increase influence in
both Syria and other middle eastern states by rescuing Syria. I see active
military equipment transfers including planes, missiles and drones to Assad
regime from China – with the desperate Russia providing arms and China
bankrolling it. This muscular response will be the first major flexing of
muscles against USA by China and we need to watch and wait for it. For the
first few months of 2015, I anticipate wait and watch by China as ISIS
exterminates all moderate Sunni factions. Then when the ISIS threat becomes
simply unbearable, weapons transfer will be done – and possibility of Iranian
and Pakistani troops on the ground cannot be ruled out at some point. If the
Russia China Iran Pakistan axis does fructify, then getting Syria on its side
would be an enormous achievement for China and is worth bankrolling (since the
rest of the Axis are all bankrupt). An Iraqi influence will also get generated
by this because of the Shias siding with Iran.
This is a solid wedge into the middle east with the Hezbollah of Lebanon
also linking up with the Shia faction.
For the Saudi Sunni faction this is a double whammy. Loss of
oil money and loss of wide swathes of the middle eastern territory. This will
be a make or break year for the Sunnis.
Specific
predictions for Asian politics in 2015.
1.
India Pakistan war – unlikely because Pakistan
is not gaining anything – it will keep tensions alive by repeated border
incidents, firing and terrorism, since it is working so well. One major border
incident and one major terrorist intrusion is likely for 2015.
2.
India China war - is not going to happen.
Instead, repeated pressure will be exerted by China forcing India to spend on
arms both missiles and ships. Each will be matched by transfers to Pakistan to
keep India under permanent pressure from a Pakistani military in addition to
China. It’s a beautiful straightforward strategy on China’s part and I predict
one major border incident and one ship based stand off between India and China,
instigated by China, in 2015
3.
China Japan standoff – at least one naval
standoff is likely in 2015 as China tries to keep its restive population happy
with slowing growth – by evoking nationalism.
4.
Syria: Assad will eliminate 90% of Sunni
opposition in late 2014 with Russian, Chinese and Iranian help,after the Syrian Sunnis have been debilitated by
the crudities of the ISIS. Syria might opt to keep ISIS alive in some corner of
the country just to trouble the Sunnis of Syria some more (just like in 2014)
and to mobilize world opinion against Sunni terror
5.
Iraq: The Shias will continue their wait and
watch mode as ISIS rrides roughshod over the Sunni population. Under Iranian Shia
influence, they will leave the anti ISIS fight to the Americans and the Kurds
for now although might join the hunt with Syria later in the year.
6.
Turkey will continue its wait and watch mode as
ISIS destroys more of the Kurds.
7.
Russia will increase arms sale to the Iranians,
Chinese Syrians and whoever else as their oil revenue reduces, including weapon
sales to India
8.
Global Sunni terror: Funds from Saudi clerics
will reduce. Overall terror will reduce as the global horror over ISIS
crudities cracks down on the hawala funding. I don’t predict any major terror
outrage anywhere in the world except India – which will be the major target in
future.
Economic predictions
China: Recession
or reduced growth to 5% or less . At least one major bank failure in 2015. Stocks
should fall but since China will cut rates and depreciate its currency, in Yuan
terms, Shanghai composite might keep its 3000+ levels and might even increase
as funds become cheaper and fuel a central bank fuelled binge. Export of cell
phones and other gadgets will reach saturation point and as the rich poor
divide widens, the markets for cheap Chinese manufacture will reduce in value terms
since people will be reluctant to replace gadgets they already have. After the
smart phone explosion of 2012 to 2014, all smart phone manufacturers will bleed
including Samsung and Chinese phone makers. A similar reluctance to replace
perfectly good clothes, shoes, gadgets, electronics etc will be a major wave
and will affect Chinese manufactured goods. As Indonesia and India (large underexposed markets)
develop to higher growth and more income, they will seek to do local
manufacture rather than import from China. Biggest export from China might be
old poor quality polluting factories, second hand equipment, dies and old technologies to India Vietnam and
Indonesia. Increasingly Chinese will learn Hindi and Indonesian as well as
English as they try to export training in manufacture and upgrade skill levels.
There may be demand for Hindi teachers in China in next couple of years.
Japan. Slow death
of Abenomics. Political actions will direct flow of Japanese capital into
Taiwan/China/India based on political risks taken by these countries.
Nikkei 15000 at end of 2015.
Indonesia: Outperform in stocks
Vietnam: Outperform in stocks
Singapore: Good performance. STI 3500 by 2015 end
Thailand: Underperform in stocks
Korea: Underperform in stocks. Kospi 1750.
Hong Kong: Underperform in stocks. Hang Sheng 20000
Dubai: Underperform in stocks and real estate. Avoid real
estate.
Australia: Underperform in stocks
India:
Modi govt is faltering and has underperformed expectations
by 90%. 2015 budget will be make or break for Modi. Current RSS type nonsense
has to stop and solid focus on economics is essential. Otherwise I anticipate a
currency collapse and flight of capital, especially the virulent anti Christian
tirades of the RSS types, which is downright suicidal regarding FDI and FII. On
the other hand, solid performance will be handsomely rewarded by Rajan with a
1% rate cut and by FII with inflows.
I expect Modi to rise to the occasion. Enough consternation
has been caused by the RSS types and Modi is likely to have adjusted to his new
situation and media equation. I expect a slew of measures from him which will
be well received by the markets, as he realizes the sutility of changing Indian
external affairs after 6 decades of stupidity – it is like changing the
direction of a supertanker – very difficult. Already the smart cities for
Delhi, GST, Coal and land bills are starting to send the right signals. More
and an increasing tempo are needed and is likely
Politics:
I expect a reduction in RSS type noise as Modi cracks the whip
– possibly after a poorer than expected performance in Delhi election. A
quieter year will start from March and should be the way to go.
Delhi elections
are difficult to call. I expect a stronger performance from AAP than most
people expect and if the RSS type
nonsense doesn’t stop soon, AAP might even win. Otherwise win for BJP is my prediction. It is possible
that the anti German row will boomerang big time against BJP - with every
middle class household having kids learning a foreign language, voting against
BJP. AAP performance depends on smart
positioning (so far lacking) and better candidates (so far very poor quality
candidates announced). Overall tendency so far is for AAP to degenerate into a
Samajwadi or Janata Party and for Kejriwal turning into a George Fernandes. If
Kejriwal steps aside and becomes an attacker in chief without aspiring to
become Chief Minister – he might pull it off. As such, he has shown unwillingness
to attack Modi on the RSS fringe hijack, education and anti muslim riots and
also to have given up anti corruption plank – and has clearly announced desire
for CM seat – this will not go down well with middle class. With present
disarray of AAP and open embrace of mainstream vote bank politics, he will come
second again and lose Delhi.
In Bihar the BJP
performance will be muted and again a 50-50% chance for BJP or JDU govt. In
other words, the Modi wave is now dead. Older equations will resurface. Bihar
election is too close to predict. All this anti muslim and conversion rows will
cause a solid consolidation against BJP and with less visibility of the Modi
govt performance, there can be no wave.
Economy:
I expect good, better
or best performance depending on Modi performance. Even if he underperforms,
economy is poised to do well even in worst case scenario except for outright
war. So investment in equities will do well.
RBI:
Rajan is in wait and
watch mode – and is planning to lower rates only if the govt performs well on
reforms. This will convert the expected economic performance into either poor
or super brilliant – if govt does well on reforms, it will make the economy
outperform. Then Rajan will cut rates by 1 to 1.5 % which will be a
turbocharger for the already well performing economy. But if govt
underperforms, then economy will be middling but Rajan will not cut and will
make life miserable for everybody. This stand of RBI is “demanding” reforms –
and I am sure there will be enough reforms to ensure a cut – and hence the
stage is set for economic ourperformance. It is a good idea – like being strict
with children for their own good, Rajan is being strict with govt for their own
good.
RBI will accumulate reserves above 58 to prevent
strengthening of Rupee. But if Rupee falls, RBI will let is fall temporarily to
get a good 10% spread on its buying and selling price – but after the flight of
Rupee, which will be at low prices of 63 or 64, again RBI will sell dollars to
bring Rupee back on an even keel of around 60. It is a wonderful strategy and
the arbitrage itself is worth many tens of billions – and as soon as people see
this tendency, wild flights of dollar out of India will stop and currency will
become stable. It is great management.
Equity:
Sensex target in worst case scenario is 60,000 in 4 years –
which is a compelling argument for equity investments since investment will
double in 4 years (17.5% compounded return) even in worst case scenario.
Sensex
target (mine) for best case scenario is 200,000 in 4 years – which is 7 times
return i.e. 65% compounded return. The main reason for rerating is going to be
increased earnings – a constant rise in earning over the next 4 years. Increase
will be due to better business environment, newer investment avenues for
corporate as well as cut in interest rates.
Real Estate:
Real estate has bottomed but is going to be a L shaped
bottom with extended stagnation. Since the returns from equity is going to be
so good, it is a huge opportunity cost to be locking up big money into real
estate – into a stagnating pond when equity is giving so much better returns.
End users can buy flat/house for self use since price falls
are largely over and one will not gain much by waiting. For end users real
estate is an expenditure and not investment – as such no need to time more
carefully. Prices will not fall. End users should defer purchase only if prices
fall in future – one need not defer for stagnation. If buying, only ready to
move and register flats should be purchased and not under construction booking.
Even for end user, rental stay and investment in equity would work better in
financial terms in view of huge opportunity cost.
I will cover real estate in a detailed write up later on.
But basic message is – avoid.
Gold:
Gold will give negative returns. Dollar strengthening is a
continuing theme for the foreseeable future and will kill gold price in
dollars. On top of that, there will be net inflow of dollars into Indian
economy and this will make the Rupee stable (stable because RBI has shown its
readiness to accumulate reserves at 58 levels). Without RBI intervention Rupee
should appreciate to 45 levels but with intervention it will remain at current
levels or around the comfort level of 60. Which means that there will be no
Rupee price inflation for Gold either – or if Rupee appreciates, Gold price in
Rupee will have dual reason to fall and keep falling. The boom years in equity
with stagnant price for gold will ensure a flight out of gold into equity and
this will further reduce demand for gold.
Bonds:
Bond prices will keep rising and yields falling as RBI cuts
rates. Already rates fell from 9 to 7.8% in 2014. After the recent blip up to
8, again yields have fallen to 7.8 based only on govt banks cutting deposit
rates. By year end, after the RBI has cut, I expect 6.5 to 7% range for the 10
year yield. But the opportunity cost of trying to ride this fall in rates is
not worth it for retail investors when returns from equity will outperform the
15 to 20% returns available from bond investors. Existing bond funds can be
sold after recent outperformance and having already got a good bulk of the
available returns. Existing balanced funds can however be held for a few more
months and shift to pure equity fund can be planned after the yield falls below
7.5% since the equity part of the balanced fund portfolio can outperform and
the rate cuts can also be taken advantage of. For fund allocation to fixed
income, this is the last chance to lock in about 8% return from FMP for next 3
years. So allocations should be completed ASAP in FMP.
Predictions for
next decade
Note: “asset to
own (year or decade) gives maximum risk adjusted returns. Asset to avoid is the
one investment one should totally avoid because risk of it killing returns is
too much – it is a mistake to hold this asset. Assets not specifically
predicted to be avoided will give middling returns but will not sink your boat –
it is not a real mistake to hold this asset.
Asset of the decade = equity (This is the asset in which one
should be maximally invested)
Asset to avoid for the decade = gold (This asset should be
avoided completely – most likely to kill returns)
(Fixed income will underperform – use only PPF
Real estate will give returns less than fixed income, unless
timed well.
Dollar denominated investments will underperform fixed
income)
Predictions for
next 4 years
Asset to have = equity
Asset to avoid totally = Gold
(Fixed income will underperform – use only PPF
Real estate will give returns less than fixed income, unless
timed well and in right location and segment and only if events transpire to
make equity underperform like wars, Hindu muslim riots on major scale etc.
Dollar denominated investments will underperform fixed
income)
Predictions for
2015:
Asset of the year = equity
Asset to avoid for the year = Gold and Real estate.
Portfolio
adjustments for 2015
No fresh exposure to real estate, hold existing real estate for
long term. Plan entry into real estate only if existing holdings fall below 20%
of corpus (unlikely to happen for most middle class people for next few years)
Sell gold if still present in portfolio
Fresh equity and debt allocations 80: 20. Existing portfolio
should also be tuned to reach this.
Overall asset
allocation for 2015
Equity 55 (or 60)
Debt 20
Real estate 20
Gold 0
Dollar denominated 5 (or 0)
Portfolio
recommendations for 2015 to 2018 (4 year recommendation and 4 year hold)
Size of portfolio 100
1.
PPF 10 (NAV on 1.1.15 = 10)
2.
FMP 10 (NAV on 1.1.15 = 10)
3.
Direct equity 25
a.
Pidilite industries 5 (price on 1.1.15 = 552)
b.
HDFC bank 5 (price on 1.1.15 =947)
c.
Asian paints 5 (price on 1.1.15 =747)
d.
Ramco cement 5 (price on 1.1.15 =342)
e.
LIC housing finance 5 (price on 1.1.15 =437)(alt:
Shriram transport)
4.
Funds 50
a.
Franklin bluechip 10 (NAV on 1.1.15 = 338)
b.
UTI opportunities 10 (NAV on 1.1.15 = 48) (alt:
ICICI Tax saving)
c.
BNP midcap 10 (NAV on 1.1.15 = 22.33)
d.
Franklin small and midcap 10 (NAV on 1.1.15 =
36.69)
e.
Reliance pharma 5 (NAV on 1.1.15 = 126.6)
f.
Franklin infotech fund 5 (NAV on 1.1.15 = 110)
5.
Birla global real estate fund 5 (NAV on 1.1.15 = 17.53)
Rationale
This is a selected stock+ sector fund + fund type of
portfolio (not a stock only or high risk stock with fund or fund only portfolio).
It is meant for safe, non monitored and risk free investment. There are 2 semi
FMCG vs construction related stocks i.e. Asian paints and Pidilite. There are 2
banks (HDFC and LICHF) and one cement. The aim is concentrated risk on high
growth. Only 3 best sectors selected ( 2 players from 2 sectors meant to
minimize company specific risk). IT and Pharma sectors are covered by sector
funds instead of specific stocks to minimize risk. There are 2 small and midcap
funds to maximize gain and one multicap and one large cap fund to capture
overall economic performance. Birla REIT can be replaced by a fund (Value
discovery) if don’t want dollar denominated hedge. I have posted the NAV on
1.1.15 and we can compare this with levels on 31.12.15 and in each subsequent
year with yearly course corrections if needed (stocks selected do not need
course correction, being safe bluechips and funds selected are anyway a 4 year hold).
I re-emphasize – this is a risk averse portfolio for prudent investment and not
meant for higher risk appetite.
These are also meant to be used for SIP (into funds) and
systematic equity plans for a drip into the stocks, to gain from price falls
which might come. However I will not be analyzing the SIP and SEP performances since
not worth the effort.
Summary of
Predictions by end of 2015
1.
Sensex 40-45000
2.
Gold stagnant
3.
Real estate stagnant
4.
Bond yield 7%
