ANALYSIS OF LAST YEAR’S PREDICTIONS
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.
ANALYSIS: These changes
are now well recognized as a major job killer
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.
ANALYSIS: Lots of progress here especially in military
training scenarios where virtual reality has come into its own
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.
ANALYSIS: Broadly world has moved on these technologies
and Tesla’s success is now legion with even Modi visiting the factory.
Will fall in oil prices,
these technologies will now not progress much and will go into slow motion.
Battery technology will progress but Solar will now stall
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.
ANALYSIS: Make in India is
now for labour and currency arbitrage only
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.
ANALYSIS: The split of
haves and have nots will accelerate now exponentially. The possibility of urban
renewal, smart cities and a big bang change brought about by Modi have now
collapsed into impossibilities. India has now failed to find even a single seat
in the table of the haves. Now as soon as someone reaches about 20,000$ per
annum productivity, he will move out of India – some 50 to 70% of all young
professionals will be forced to move out of the country for anything over
20,000$ which will become a ceiling.
It is a disaster and given
the slow pace of reforms, even 10 years from now this trend is likely to
persist.
Singapore, Australia,
Europe, Dubai will be the main magnets for emigration. Because of this human resources
disaster, the limits of growth and development will be at much lower level in
India since other countries will reap the rewards of our countries talent.
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.
ANALYSIS: India has
already missed its last chance. There is no hope.
Oil economy
This deserves a small section in itself. Oil price has fallen to 50$. I didn’t
see it coming. In the immediate term it indicates a recession to come.
ANALYSIS: Recession came
But the linkage of productivity
increase to oil price is a more important indicator. West has stagnated at 40
to 50000$ 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.
ANALYSIS: Lots of people
have been saying this nowadays – but the sharpness of the fall has been
surprising and has changed the equation. Oil prices are now so low that solar
will now slow down a lot.
We have seen the last hurrah of Gold and of Oil. Both are now dead.
ANALYSIS: This year both
died.
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.
ANALYSIS: Food prices
collapsed in 2015
Changing trends with recognition of health problems with high beef and pork
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.
ANALYSIS: These changes
are yet to happen
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.
ANALYSIS: Indian food
problem is only one of administration e.g. failure to have pulses minimum
support price caused the pulse prices to zoom.
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.
ANALYSIS: All these are
well recognized now.
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.
ANALYSIS: Not yet happened
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.
ANALYSIS: Slowly happening
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.
ANALYSIS: Happening slowly
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.
ANALYSIS: Came true
Specific predictions USA
Stocks slightly higher in the year. Maybe 18000 to 19000 Dow.
ANALYSIS: They are
slightly lower to flat
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
ANALYSIS: Lots of people
made money from picking the right stock
Oil. 50$. I think it might be volatile but will settle around 50
ANALYSIS: Fell 20% more
than my anticipation
Gold. 1050 to 1200 range with a downleg when Fed raises rates.
ANALYSIS: Came true
Bonds. 2-2.5%. Any rise would be good news, but I doubt it.
ANALYSIS: Came true
Real estate: Firm
ANALYSIS: Came true
Where to invest in USA: REITS 25%. Selected stocks 25%. Emerging market (India,
China, Indonesia) 50%.
ANALYSIS: Proved to be
good advice. China early exit was needed after prices doubled in 6 months
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)
ANALYSIS: BSL Real estate
fund remained flat. Proved false.
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.
ANALYSIS: Happened.
Spain likely to see a fractured
mandate and solid political disruption causing flight of capital.
ANALYSIS: Fractured
mandate came true. Flight of capital already happened before but likely to
continue
Currencies will be slowly depreciating against
dollar.
ANALYSIS: Happened
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.
ANALYSIS: Right advice.
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.
ANALYSIS: Modi has made
good progress in Bangladesh. Burmah problems happened as anticipated
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.
ANALYSIS: All of these
developed further. Modi has done well in countering these
India will be forced to expend a lot of money on its Navy.
ANALYSIS: Happening
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.
ANALYSIS: Happened.
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.
ANALYSIS: The Russia China
Iran axis is now shaping up more than China Pakistan Axis, since Pakistan is
Sunni. They gave more support to
Assad than expected and the US has been majorly stymied
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.
ANALYSIS: Happened. But
Saudi reserves are sustaining their campaigns.
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.
ANALYSIS: Happened.
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.
ANALYSIS: Happened.
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.
Happened.
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.
ANALYSIS: Happened
This muscular response will be the
first major flexing of muscles against USA by China and we need to watch and
wait for it.
ANALYSIS: It was well
disguised under Russian cover.
For the first few months of 2015, I
anticipate wait and watch by China as ISIS exterminates all moderate Sunni
factions.
ANALYSIS: Happened.
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.
ANALYSIS: Happened except
it was Russian troops.
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.
ANALYSIS: Pakistan is out
of it but the Shia wedge continues to strengthen as expected
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.
ANALYSIS: They are still
very much in the game. Saudis have played a good game
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.
ANALYSIS: Happened
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
ANALYSIS: Did not happen –
but Japanese India collaboration increased
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.
ANALYSIS: Happened but
instigated by Japan and USA rather than by China
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
ANALYSIS: Happened exactly
as expected
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.
ANALYSIS: Happened exactly
as expected
6. Turkey will continue its wait and watch mode as ISIS
destroys more of the Kurds.
ANALYSIS: Happened
7. Russia will increase arms sale to the Iranians, Chinese
Syrians and whoever else as their oil revenue reduces, including weapon sales
to India
ANALYSIS: Happened
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.
ANALYSIS: Paris proved me
totally wrong – as the IS is pressured and its voice increases, terror outrages
are increasing.
Economic predictions
China: Recession or reduced growth to 5% or less .
ANALYSIS: Happened
At least one major bank failure in
2015.
Only brokerages collapsed.
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.
ANALYSIS: Happened in a different
way – rose more and fell but still above the 3000 levels as predicted. Stimulus
was mostly missing as China reduced its reserves instead.
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.
ANALYSIS: Yet to happen –
but likely
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.
ANALYSIS: Nikkei did much better. But economy
underperformed. Abenomics still alive and kicking.
Indonesia: Outperform in stocks
ANALYSIS: Wrong. Fell 10%
Vietnam: Outperform in stocks
ANALYSIS: Wrong. Flat
Hanoi
Thailand: Underperform in stocks
ANALYSIS: Happened. Fell
15%
Korea: Underperform in stocks. Kospi 1750.
ANALYSIS: Did a bit better
but not much
Hong Kong: Underperform in stocks. Hang Sheng 20000
ANALYSIS: Did a bit better
but not much
Dubai: Underperform in stocks and real estate. Avoid real estate.
ANALYSIS: Happened. Fell
15%
Singapore: Good performance. STI 3500 by 2015 end
ANALYSIS: Wrong. Fell 10%
Australia: Underperform in stocks
ANALYSIS: Happened. Flat
to down for the year
India:
Modi govt is faltering and has underperformed expectations by 90%. 2015 budget
will be make or break for Modi.
ANALYSIS: It broke. Budget
was very bad with tax hikes instead of tax cuts.
Current RSS type nonsense has to
stop and solid focus on economics is essential.
ANALYSIS: Did not stop. RSS
nonsense cost them Bihar election
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.
ANALYSIS: There was flight
of capital and RSS contributed.
On the other hand, solid performance
will be handsomely rewarded by Rajan with a 1% rate cut and by FII with
inflows.
ANALYSIS: Poor performance
delayed rate cuts and caused flight of capital and loss of confidence.
I expect Modi to rise to the occasion.
ANALYSIS: He failed.
Jaitley failed.
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 futility 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
ANALYSIS: Did not happen.
Modi failed.
Politics:
I expect a reduction in RSS type noise as Modi cracks the whip – possibly after
a poorer than expected performance in Delhi election.
ANALYSIS: Did not happen.
Modi unable to crack any whip.
A quieter year will start from March
and should be the way to go.
ANALYSIS: Hotheads ruined
it.
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.
Happened.
Otherwise win for BJP is my
prediction.
ANALYSIS: Prediction
failed since RSS nonsense continued.
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.
ANALYSIS: Wrong
predictions
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.
ANALYSIS: Yes Modi wave
was indeed 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.
ANALYSIS: We all know what
happened.
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.
ANALYSIS: Wrong. Will
analyse this wrong prediction in detail in subsequent section
RBI:
Rajan is in wait and watch mode – and is planning to lower rates only if the
govt performs well on reforms.
ANALYSIS: Govt failed to
reform.
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.
ANALYSIS: He did make life
miserable for everyone and converted a below average performance into a
disaster by his rigid stance. Too much rod can convery child into a juvenile
delinquent.
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.
ANALYSIS: He made bad into
worse
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.
ANALYSIS: Despite good
management, currency is down by 15%.
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.
ANALYSIS: My predictions
and targets stay as such. 2016 saw no increase in earnings due to Govt and RBI
actions – which I had hoped for. But the long term targets and possibilities
remain as such – and one should hold equity for 4 years at least.
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.
ANALYSIS: Everybody saw
this and piled into equity causing a boom and a bust within 2015.
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.
ANALYSIS: Yes, they did
not fall after already falling in 2014
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.
ANALYSIS: Everybody
believes this now.
Even for end user, rental stay and investment
in equity would work better in financial terms in view of huge opportunity
cost.
ANALYSIS: Everybody
believes this now.
I will cover real estate in a detailed write up later on. But basic message is
– avoid.
ANALYSIS: Good advice.
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.
ANALYSIS: Good advice
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.
ANALYSIS: Good advice on
FMP. Long term yields held stable despite the rate cuts. Short term yields fell
much more and gave good DBF returns.
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
ANALYSIS: Wrong. It was FD
Asset to avoid for the year = Gold and Real estate.
ANALYSIS: Right
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 Wrong
2. Gold stagnant Right
3. Real estate stagnant Right
4. Bond yield 7% Wrong
ANALYSIS: The main incorrect prediction was the stock
market performance. I had made a major error in earnings growth because of
errors in expectations for rate cut and for reforms. Both were not forthcoming.
There were two reasons why
I went wrong. First was not realizing the extent of the dependence of indices
on commodity prices. Any index target should be based on analysis of the
individual components rather than on guesstimates based on economic growth and
its effects on index. I will correct this mistake this year. I failed the see
that earnings growth in some companies were more than countered by earnings
reduction in metal and mining companies which are index heavy weights.
Second was not realizing
that a substantial component of the index earnings were dependent on export performance.
Thus companies like Asian Paints or Reliance or Vedanta had majority of
earnings abroad and these contracted a lot. So earnings decreased rather than
increased.
The external factors were
first RBI action – I expected better performance from Rajan.
Raghuram Rajan has been
the main culprit for converting a boom into a bust. He kept rates high and
shifted to CPI tracking. Indian economy is a supply side constrained economy
and higher rates actually boost inflation rather than reduce it – especially in
inflation of essentials. This has been my contention for long and the RBI
actions and their effects have confirmed this.
Two main errors of RBI
were first in tracking CPI (which is not RBI rate sensitive) and not tracking
the WPI (which is genuinely rate sensitive. Second error was waiting too long
to cut rates and not realizing that all NPLs were in fact created due to
central bank action rather than poor lending practice
All infrastructure company
loans were taken in 2006 to 2008 period when rates were quite low. Reddy raised
rates in 2007, making life very difficult – if you take a loan at 8% and now
you have to pay 12%, then how can any company sustain? Subba Rao first raised
rates, then lowered it a lot, and then raised it again – by 2013 rates were 14%
for the corporate which are obviously not sustainable – what infrastructure can
generate such high returns? Obviously companies were unable to complete
projects.
Rajan should have cut
rates aggressively. Long term govt bond rates are currently 7.7%. They should
have been below 7% by March 2015 if the economy was to recover. Rajan delayed
till May and still was tardy and target still remains unachieved. All
infrastructure companies will be back in black only after rates are low. All
the NPL problems are created by RBI by keeping rates high – same loan will
start performing if rates are cut. Rajan has been too stupid to realize this.
Because of him, now Indian recovery will be delayed by 5 years and some 50
million people will remain in poverty because of his failure.
His supposed inflation
targeting is also a failure. He has chosen the wrong index to target and has
failed to realize that money supply is the main bottle neck in fighting
inflation. Cheaper money causes reduction in inflation in India unlike
developed countries. Failure to recognize this has costed our country dear.
The second culprit is the govt. The budget was very bad.
Instead of tax cuts, there were tax hikes on corporate from surcharge increase,
service tax increase as well as excise increase on petro products. All of these
converted boom into a bust.
Govt also failed to disinvest aggressively when the market
was good. Now with burst of commodities, most of the companies will remain
unsellable for many years. Very very bad performance from govt. They neither
knew what to do, nor did they do anything good.
I was wrong to be optimistic on govt performance. It is a non
performing govt. and subsequent predictions will require a more realistic
assessment of its capabilities.
