General Predictions for 2015

Happy New Year 2015

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 1/7^th 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%

ANALYSIS OF LAST YEARS REAL ESTATE FORECAST

FORECAST IN BLACK

ANALYSIS IN BLUE

2014 - The Year Ahead
(Indian Real Estate Scene in the first quarter of 2014)

The consensus of opinion on IREF is that the slowdown of 2013 will continue well into 2014. All the factors which caused the bear market of 2013 are even more active in 2014. Until the economy turns around, the industrial recession gets over, the job market recovers and inflation is controlled, the bear market will continue.

Came True

NCR market:The main Delhi market dominated by builder floors has seen actual reduction in prices from the peak by upto 30% in some areas. Dwarka which is one of the large micromarkets within Delhi dominated by apartments has also seen reduction in prices. Now that the correction is over, 2014 is likely to see stagnant prices.

Came True and prices continued to show mild decline in 2014 as well

In Gurgaon, the resale market in under-construction flats has almost died out completely, because of poor delivery record by real estate companies. Dwarka Expressway is the region with the maximal stagnation and absence of deals since the road infrastructure is yet to be completed.

Prices in completed complexes and ready to move (RTM) flats in Gurgaon, especially in Sohna Road are stagnant with few takers at such high prices. There are no price drops since the investors are holding at current prices and are likely to continue to do so in 2014 as well. Further price escalation in this category is unlikely in 2014 although price drops are also not on the cards. Much of the inventory of ready to occupy flats is already in the hands of the end users or long term investors.

Came True and prices continued to show mild decline in 2014 as well

Prices of under-construction (UC) flats in Gurgaon on the other hand are likely to correct in 2014. In 2013, deals died out, but the prices were stagnant. In 2014, the prolonged stagnation, demand for payment from builders and no visibility of further price appreciation is likely to see liquidation of holdings by investors ready to book the remaining profit and limit outgo as constructions complete. This is therefore an opportunity for end users to strike good deals. The maximal such deals are likely before the central and Haryana assembly elections which are about 5 months and one year away respectively. Potential completion premium, usually estimated at 30% is likely to reduce to a much smaller number of around 5 to 10% and thus the benefits of holding on to the flats has reduced for investors. This is likely to result in dropping resale rates of under-construction property. The reduced completion premium will be more marked in Dwarka Expressway since the road and other infrastructure is lacking and hence end users will not wish to move into suboptimal living conditions. In contrast Golf Course Extension Road might maintain premium due to better surroundings and living conditions.

Came True

Plot market is stagnant in Gurgaon in central and peripheral locations and this is likely to continue in 2014, making it unattractive for short term investors. Because of inventory overhand in apartment segment and escalating construction costs as well as changing trends of end user preference, very few people are constructing builder floors in Gurgaon.

Came True

NOIDA: A similar stagnation of prices to Gurgaon is likely to be seen in NOIDA and Greater NOIDA West, but to a lesser extent since NOIDA has more middle income apartments rather than luxury apartments and hence downside is limited. Since almost all builders have drastically slowed on delivery, and because middle class end users are ready to occupy flats even without infrastructure due to affordability factor, a potentially larger completion premium of 20-30% is likely in NOIDA, quite the reverse to Gurgaon where completion premium is likely to reduce, since most of the property is in the luxury sector. Thus majority of NOIDA investors are likely to hold through for long term and a stagnation in prices is likely throughout 2014 without the anticipated price falls of Gurgaon.

Came True and prices continued to show mild decline in 2014 as well

More peripheral locations in the region like Yamuna Expressway, Greater NOIDA main, Kundli and Faridabad are unlikely to see much activity in 2014. Prices are likely to fall in these regions, but more dramatic will be the absence of resale activity as end users stay away.

Came True

Mumbai: Stagnation in main city is expected. Suburban locations are likely to see reasonable price performance linked to Indian economy coming out of recession. Stagnation in the 5000-10000 psf price range and better performance in the 3500-5000 psf price range is likely.

Came True

Bangalore: Saturation of the Bangalore market in the last two years will lead to stagnant prices but slow and steady off take by end users on the back of numerous launches seen in 2013.

Came True in most locations. Some locations fell

Chennai:If industrial revival takes place in latter half of 2014, then Chennai might see a good number of launches in the affordable housing segment in the periphery. As the infrastructure projects slowly get completed, a better real estate market with new launches as well as redevelopment in plotted segment is possible.

Did not happen

Investing in Property in 2014:

In view of the slowdown, property is a poor sector for investment.

Came True

Long term investors looking to buy property for post retirement self use or for holding periods of over 10 years can enter in select locations, cities and segments and look for bargains. The threads on “distress sale in depressed market” on IREF, located in multiple cities, might be a good place to start for this purpose.

Certain general rules for real estate investment in a slowdown can be kept in mind.

1. In a bear market, one should select property in prime locations and not in peripheral locations, since prime locations will be the first to reverse price direction and will give the most sustained returns once the bull market returns
2. In a bear market, one should invest for the long term. For property, a time frame of 15 years or more is ideal.
3. Short term flipping for quick gains on leverage should not be attempted in bear markets. This technique is reserved for bull markets.
4. The most depressed prices in distress sales will be in luxury property and in plots. These will rise the most when the market turns. Deep pocketed investors with the ability to pick up the distress sale and holding through the uncertainties of the bear market will reap the maximal rewards. Deep pockets and lack of leverage will amplify returns in bear markets – thus bear markets make the rich even richer because they alone can afford to buy and hold. This is in contrast to bull markets where short term holding and leverage amplifies returns and risk takers benefit rather than long term holders.
5. The safest investment for middle class investors in a bear market is already built ready to register flats in the affordable segment in the main central areas of the city with existing infrastructure
Luxury property as a whole is better avoided for the year 2014. This is because prices are already high and it is better to wait for lower prices and for bargains to emerge. As the luxury flats booked by investors slowly get completed, investors will be ready to negotiate with bargain hunters.
Plots are also avoidable because of the existing high prices and the lack of performance in plots in the central areas of Gurgaon even during the bull market of 2010-2012. The higher prices for construction of builder floors on plots has made them expensive and out of reach for many. Buyers are also preferring to live in apartment complexes due to better security and amenities. As such, a changing preference of people over time makes it difficult to extrapolate previous price behavior of plots in the past 50 years. Waiting for better bargains but also actively looking for bargains would be prudent for property investors.

Property in the affordable range of 2500 to 5000 psf range will be the best segment for entry, for both end users and investors, due to limited downside.

All of these were correct advice

The main requirement for a boom in property market is a recovery from the current industrial recession. Until the industrial revival generates more well paying jobs, the real estate market cannot revive. The industrial revival is likely to happen in the next 2 years based on cyclical factors, however the strength of the industrial revival is crucially dependent on the general elections of 2014. A strong decisive pro-industry government will cause a dramatic improvement in the industrial climate and a sustained stock market performance followed by an equally sustained real estate market performance will follow. A fractured mandate will cause a weak revival but consequent turbulence in exchange rates can have unpredictable results on real estate price inflation. High imported inflation, escalation of raw material prices, escalation of capital cost etc can have paradoxical results in the real estate market by making the cost of new construction prohibitive. Existing property which is registered may therefore become more valuable while under construction projects might be abandoned.

The prudent real estate investment is therefore to buy only ready to move ready to register flats in the affordable range in central locations and having good infrastructure – or to wait for the general elections and perhaps the Haryana elections also to get over before making any fresh commitments into property market.

As with equity, the best option is to wait for the general elections to get over.

The best locations for investments in 2014 are:

1. Chennai
2. Bangalore
3. Dwarka in Delhi/NCR
4. RTM property in Thane and other similar locations in Mumbai

The locations to avoid for 2014 are:

1. Dwarka Expressway, Yamuna Expressway, Kundli, Faridabad for location
2. Under-construction property in NOIDA, Gurgaon, Mumbai suburbs, Pune – in all of these locations prefer property which is ready to move and register
3. Plot investments in all locations
4. Land in tier 2 and tier 3 cities – prefer ready to move built up property only

Despite property being in a bear market, it is a good hedge against Rupee depreciation in the long run and hence every person should have some exposure to property. Buying small ready to move in flat (I BHK or smaller if salary is inadequate) based on a small portion (<20 a="" always="" and="" any="" arise="" at="" be="" br="" buying="" can="" does="" done="" emi="" for="" going="" investment="" not="" of="" prudent="" question="" salary="" such="" time.="" timing="" towards="" would="">
All of these were correct advice

ANALYSIS OF LAST YEARS PREDICTIONS

PREDICTIONS IN BLACK

ANALYSIS IN BLUE

Predictions for 2014

I am making this briefer than last year because the main problem is the Indian elections. Everything else depends on that. I have already written on elections.

Broad predictions for USA

Politics: Not much to happen. Budget issues should go through with wrangling

Democrats managed to lose both houses. But budget issues went thru as expected

Economics: Slow improvement throughout 2014 is likely. Jobs will keep growing as the workforce retrains. Corporate investments will continue to be slow and the 2 trillion cash pile with corporate will still not get fully deployed.

Came true

Fed: Likely to pause taper after the bond rate reaches some 3.25 to 3.5 5 and then keep rates at around this level for the remainder of 2014. Short term rates will remain 0. Probably the comfort level for the bond rate is likely to be achieved around 40 billion repurchases per month levels and this should be achieved around April 2014.

They managed to finish tapering after all. Economy did better than expected. I was majorly wrong on bond rates - currently 2.1 to 2.2. About half of my expectation.

Specfic predictions:

Stocks – stagnant. Dow 17000 by end of 2014.

Came true

Bonds – slow fall to bond rates of 3.5% or so, as targeted by Fed

Wrong prediction. Bonds went higher.

Dollar strong. Dollar index 83-85 by end of 2014

Came true

REIT – Expect about 5% annual return from REITS.

Came true

Real estate – stagnant in both old and new areas after recent run up

Came true

Gold – stagnant at about 1150-1250 range.

Came true

For Indian investor: US market can be completely avoided, with the sole exception of US REITS for the sake of 5% dollar denominated returns.

Came partly true. REITS did well but US market returns were very good

Europe Broad Predictions:

Politics: Conservatives and Christian Democrats continue in West Europe.

Came true

Economics: Slow grind without too much out performance by both UK and German companies.

Came true

Steady migration of East Europeans into both these economies should help achieve 3-4% growth for 2014.

Came true for UK.

France less than these two. Italy slow improvement in manufacturing. Spain and other lower country Europe stagnant.

Came true

East Europe good steady growth of 3-4% based on better jobs for their population, increased training levels and also based on remittances from expat workers.

Came partly true. Local East Europe economies didnt do as well as expected

Transatlantic trade block:

This is a major development for 2013 – and presages increased economic co-operation between the North Americans and the Europeans. UK sitting in the middle is likely to be the biggest beneficiary of this future development of a 40-50 trillion GDP economic superpower which is well on the way to being created. This development dwarfs all previous trade zones and will bring great economic benefits. Central to this trade block is the export of energy from USA and the export of engineering technology by Germany. This trade zone is likely to benefit from the upward migration of the Eastern Europeans and the Southern Europeans to higher levels of productivity and will involve increased transnational labour movements in the technology, health care and services sectors. A resurgence of manufacturing in USA is likely to be seen, based increasingly on Mexican workforce moving from 10000 to 25000$ per capita per annum productivity. The world has not yet realized that this massive economic co-operation zone is being created as we speak and that it is this trade zone which will dominate the rest of this century, not China.

The existing Euro zone is destined to break up because of high differences in productivity levels and work cultures – and the transatlantic trade block with individual treaties by each country with major partners is likely to replace the Euro zone. This is a major change in global economics and an early spot of these changing trends can make you a great deal of money. It is not possible for one central bank to set policy for 2 zones with different productivity – that is the main realization which has dawned from the Euro crisis. It is unlikely that Germany and Netherlands will give up their central banking independence for increased trade when the same trade is equally possible over a larger transatlantic trade block with reduced barriers and more advantageous trade agreements.

UK is likely to be the epicenter of the transatlantic trade block and will greatly benefit economically- once again underlining that the English, who kept Bank of England and their own currency are an intellectual super power who have outsmarted the entire world for the past 250 years and continue to dominate even now. Ports and logistics will benefit greatly – UK, Denmark, Norway and Netherlands will all get a piece of this massive cake.

In a way we are harking back to the economics of 1830 to 1870 when Victorian Britannia ruled the waves and the great economic expansion of Europe took place. The basic building blocks of such an economic transition and expansion are on the cards. There has been a 20 year stagnation in productivity of Europeans and Americans. It is likely that better trade, removal of barriers, more manufacturing automation will change this. Germany has already shown the way and rest of Europe and mainland USA is likely to follow. Per capita GDP by 2030 might be 75000 dollars per capita per annum in constant dollars i.e. a 50% increase in productivity of existing population. Add to this a 20% increase in population due to migration of Mexicans and Eastern Europeans over this time period means a 70% increase of total output from 30 trillion to 50 trillion dollars.

If and when Germany leaves Euro, there will be a dramatic 50% response from German stock markets with Dax touching 15000 levels. If UK leaves Euro zone trade restrictions, then again, a dramatic 50% response of FTSE to 12000 levels.

Starting to come true with UK debating on remaining within the Euro. These economic movements likely to play out over next 2 to 3 years

Specific Predictions for 2014

UK: Stocks up. As the block takes off, a spike in FTSE upto 10,000 might occur

Came partly true. FTSE topped out at 7000 only.

UK: Real estate flat. Prices have already run up

Came true

UK: Banks up. Bank of England rates stable for next year with no policy changes for now

UK eased a lot. So wrong prediction. There was insufficient strength from the economy to achieve the prediction.

UK Sterling: likely to strengthen further by 10% over 2014.

Wrong. Sterling strengthened in 2013 but largely static with some weakening against Dollar.

Germany: Stocks flat. Euro zone rates from Draghi likely to be stable.

Stocks were up. Draghi cut

Euro is likely to weaken over 2014 as and when the fissiparous tendencies take hold.

Came true

Transpacific Trade Block

This is the other major trade block which is taking shape, more specifically directed against the Chinese Axis. Likely to be a military-political-economic alliance between Japan, USA, South Korea, Taiwan, Singapore, Malaya, Indonesia, Australia and Vietnam. Apart from the US production of 15 trillion already counted with the trans atlantic alliance, this includes 5 trillion of Japan, 1.5 trillion of Korea, 1.5 trillion of Australia and 1 trillion of Indonesia with the rest small change adding up to another trillion. Assuming growth in Japan GDP to 6 trillion, that means 10-12 trillion of GDP which is one and a half times that of China.

Japan and USA would love to include India within this block but Indians so far are being stupid. Japanese overtures, including the recent visit by the emperor in this regard are however very important. If we get NaMo as PM and republicans in next US elections, then India will be a full partner within this alliance. But if the democrats win and we have a third front in India, then India will get bypassed once again.

These changes will undermine the existing economic blocks in which China has influence – the Japanese investments in Chinese manufacturing, Taiwan investments in mainland China and the South East Asian trade, This trade block is specifically anti Chinese and hence India has much to gain from this alliance.

This is not yet in play but likely to crystallise based on the actions of Modi. A republican win for Jeb Bush would be needed to push this into major action

The Indo Gulf trade block

This is a traditional 4 millennia old trade block – existing from Indus valley civilization, based on sea coast geography - which has been ”blocked” due to the religious divide (Hindu Muslim and Shia Sunni). Once again, if NaMo comes and if Pakistan jettisons the Chinese axis in favour of the Transpacific alliance – then this block can take shape once more after 2 centuries of atrophy under European colonial rule. The shifting sands in Iran are key to this – the cooption of Iran away from China might take place after recent events happening with USA – Iran’s big deal.

Traditionally the Persian Gulf with Oman, UAE/Dubai, Basra/Kuwait, Iranian coast, Karachi and the Kutch ports had been a major trade zone – the biggest in the ancient world. Currently Iran with 500 billion, Soudi with 800 billion, UAE with 400 billion and others with 2-300 billion GDP are mainly oil based economies. Trade related (non oil) GDP of these countries are maybe 500 billion in aggregate, including the contribution of Kutch and Karachi. By 2030 this can quadruple to 2 trillion dollars exclusive of oil. Add to this the transshipment of oil from central asia (Khazakhstan, Azerbaijan, Turkmenistan etc) and the potential increases to about 3-4 trillion dollars of new GDP over and above existing GDP. That makes it a great growth area.

More importantly the UAE i.e Dubai and Abu Dhabi coast sitting in the middle of this zone and ready to offer peaceful employment to professionals and industrial workers from everywhere – mainly India especially Malayalees - are sitting on a manufacturing possibility as well. It is possible that the population of UAE might cross 15 million people by 2030 i.e double from current 8 million levels, mainly by expats – and its GDP might cross 1 trillion dollars. Peace in the Persian Gulf would mean a drastic lowering of the risk premium and a tripling of shipping size by 2030.

Essentially, the UAE can provide a zone of peace, law and order and good governance with great infrastructure – and import the manpower from the surrounding countries of South Asia who have high population and good capabilities currently unharnessed due to poor governance – to generate wealth. The model, going on for 30-40 years, has endured well and has reached a take off potential. The recent expulsion of Saudi Expats is likely to give a ready pool for UAE to expand – and the UAE is a Anglo American controlled area – non Sunni Islamist to boot – and is likely to be encouraged to expand at breakneck pace by the Anglo American Alliance. As US moves closer to Iran and reaches equidistance from Saudi – the UAE is likely to be coopted by the Anglo Americans to be a counter weight and demonstrate an alternative model to Saudi Arabia.

Political stability, peace and a major change of Iranian, Pakistani and Afghan mind set is needed for this development. Currently things are hanging in the balance – in all 3 countries.
Of these, the most mature and advanced mindset is in Iran, thanks to its history. The Khomenian regression seems to have largely run its course. Recent deft handling of the nuclear crisis portents well for Iranian integration.

Afghanistan and Pakistan are unbalanced and very poor states. Poor education levels of Afghanistan mean that it can never benefit from the trade – and hence it is likely to be a spoiler.

In Pakistan, a shift in the balance of power away from Punjab and towards Sind and Karachi will be resisted by the Army. But large number of capable professionals can still tilt the balance. My own estimate is that Pakistan will not change or will change after many years – maybe 5 + years and only after an economic crisis.

So the push for this block has to come from Indo Dubai and Indo Iranian Central Asian energy pipeline spearheads – with Anglo American support - which can only happen with good leadership from the like of Modi. Socialists (third front/AAP/ Congress/Communists) are not capable of such vision – India under these have always had poor vision in commerce and foreign policy.

The chances of any of this happening in 2014 are basically nil. But for the first time, the potential has reared its head thanks to the recent Iranian shift – and this fluid situation is worth watching and India’s foreign affairs ministry should try to influence this. Setting up Indo-Dubai Free Trade Zones in Gujarat, Maharashtra and Kerala would be the logical step to access large quantities of capital and also to restart the manpower training of Indians – we badly need to train our workforce.

From India the play is on. Chabahar and the Turkmenistan railway is in play. Iran continues to try to get closer to USA but the Democrats rebuffed them. Again a straight talking republican alone can make these things happen, not a weaselly democrat.

The Shia Sunni cold war is on. The coming of ISIS was unpredictable but has changed the dynamics totally. With Baathists of Syria likely to win, and US tied to Saudi Aramco at the hip, there is no telling how this will play out.

Other global events:

1. Wars: I am downgrading Iran as flashpoint – but renewed Shia Sunni fight for dominance in Syria and efforts by Sunni Pakistan to export nuclear technology to Soudi Arabia continue to be dangerous. Hopefully the UAE’s economic performance will persuade Saudi to look for economic rather than religious dominance, but seems difficult for now. Saudi with 800 billion in output is still the richest and most dominant economy in West Asia. 2014 is a crucial year to see future direction of this great game – as Syria reaches boiling point

There was no export of nuclear technology yet. Likelihood increased though after the Saudi GDP expected contraction to about 700 billion i.e. 15% haircut in the output for the year

2. North Korea: Again downgrading, despite the crazy execution of the uncle. China is actively discouraging adventurism, but still, the young Un is crazy, so unpredictable

Remains as such

3. China Japan – an arms race with Japan/ Taiwan/USA on one side and China on the other for dominance is now inevitable. Since Japanese capital was routed through Taiwan into Chinese manufacturing, there is going to be a lot of rerouting – India can get a piece of the cake but for now, Vietnam (bizarrely) and Indonesia have been more pragmatic in attracting capital

Came true

4. Afghanistan. Very crucial time for this country – the US withdrawal and Karzai leaning towards India – and the usual Indian stupidity in foreign affairs means that a dangerous civil war is looming between Karzai, sections of the Pushtu supporting him and northern alliance on one side and Taliban Pushtu on the other side. Partition of Afghanistan into a Pro-pakistan zone and a Pro-Indian zone is possible – Indian foreign policy should be directed at a favourable partition into Iran borders/Herat/Northern Alliance which is on the side of India but covers the gas bearing and oil pipeline lands – so that a central Asia to Iran gas/oil pipeline can be made which is outside the Taliban Pushto Pakistan Axis. The Rump Pushto/Taliban areas of Afghanistan with majorty of the poor and illiterate Pushtos should be kept away from the pipeline by adequate ethnic cleansing with active American, Iranian and Indian military/diplomatic/special forces CIA action. Iranian ports can be used for the export of both Iranian gas/oil and Central Asian gas/oil. Ultimate long distance aim of India for future Pakistan should be balkanization into the Pushto areas of Rump Afghanistan and NWFP as first area, nuclear defanged Punjab as second area and a new Balochistan/Sind coastal region which should gain partition excluding the Pushto populations of Karachi and Quetta (who go back into the Pushtoonistan regions by ethnic cleansing). The coast of Balochistan/Sind should become port based and integrated into the Indo Gulf trade block. This would also bring the Balochi oil and gas into the trade block. Active resistance from Pakistan and Saudi (1 trillion of GDP together) would need to be broken with CIA help. For now, let us see whether the break in Afghanistan comes along favourable or unfavourable lines – Iran is likely to be more influential in Herat than the stupid Indian blunderings – and Iran is a much better player than India – so easiest prediction is a convulsion in Afghanistan in 2014 with a semi partition – and civil war.

There was no civil war. Thank God.

5. Pakistan: By middle of 2014, the main transpacific alliance would be at logger heads with the Pakistan China Axis – and Pakistan would have to choose sides. I have no clue which side they would choose – but Pakistanis are cleverer than Indians and would play their cards smartly. I hope they would abandon their 60 year alliance with China and choose their equally long 60 year alliance with USA – but I cannot predict. Let us see how the new Army Chief behaves. Nawaz Sharif is anyway total opportunist and will go with the Army.

In the event, the tribal of Khyber and Waziristan being bombed by the Pak Army. Looks like Pakistan hedged its bets for this year. China also pushing Pak on these loonatics - who export terror to Xingiang.

6. Syria: This has gained importance. Whether the Shia or Sunni win is a big deal – because Iraqi Al Qaida is also dependent on continued strife in neighbor Syria. The recent victory of the US-Iran deal will determine future events. If they get closer together, then USA will let the Shia Baathists win against the rebels – this is a favourable event because Iraqi Al Qaida, Wahabi terror and Syrian Sunni rebels are all together and a defeat with return of peace would be in India’s best interests. But very unpredictable. I would predict US victory on the side of the Baathists in 2014.

Came true.

Although ISIS was unpredicted, ultimately the US bombed the ISIS which was on the side of the Baathists only. Because of the bizarre madness of ISIS, it has ensured defeat for the Sunnis and victory for the Shia, much against the wishes of USA.

7. Egypt. The jasmine revolution has failed in Egypt. Unlike in India where AAP has found favour, in Egypt every event has been unfavourable. A slow withering of the Muslim brotherhood is the favourable event for India – but unfortunately the reverse seems to be happening. Egyptians are quite intelligent and a democratic and prosperous Egypt (which in the past was anti middle class like India and forced emigration of Egyptian expats like Indians) – and a resurgence of industry, services and manufacturing in Egypt would be in the best interests of India and the world. But my prediction for Egypt is turmoil in 2014.

Came true. Muslim brotherhood is out.

8. South America – the bursting of the commodity bubble has caused a return of inflation and poor economic performance – along with resurgence of leftists. The alliance with China is saving a lot of these countries from economic ruin – and is bad news for India and the Anti Chinese alliance. My prediction for 2014 is increased leftist activity, persistent inflation and turbulence in the region.

Came true

Specific predictions for the world events – for 2014

1. Transatlantic alliance: Low key for now. German decisions on Euro Zone unlikely in 2014. No progress expected

Came true

2. Transpacific alliance: Likely to be very active.

Was less active than I expected

3. Military activity in Pacific: China has one aircraft carrier and second is under construction. Japan has 1+1. USA has 10+3. China and Japan are are likely to commission one more each. USA is likely to reduce carrier groups in Gulf and shift to Chinese region. Japan and India are likely to commission many submarines – the next cold war is likely to be sea based, carrier based, submarine based, cruise missile based and drone based. Massive Japanese investment into drone technology is likely. There is already news chatter in this regard after the Senkaku islands.

Came true

4. Military activity in Korea: Increased threat perception in North Korea due to the drone technology of Japan can cause a war – 5% chance.

Did not come true

5. Military activity in Gulf: Unlikely. USA and Iran likely to stay quiet while the small time activities of Syria, Iraq and Afghanistan sort themselves out. US likely to see which way Pakistan goes – USA or china.

Came true

6. Syria – slow death of the rebels is likely

Coming true despite spectacular gains of ISIS. By edging out the moderates, ISIS has ensured its own demise

7. Iraq – slow death of the Al Qaida is likely

Wrong - ISIS took over most of the country. Goo play by the Shias - the ISIS is so extreme, it ensures its own slow death. MEanwhile they have made like hell for the Sunnis and the Kurds - which is to the advantage of the Shias.

8. Iran – likely to get closer to USA

Iran tried but the US trying to balance with Saudi

9. Afghanistan – increased Al Qaida activity as USA exits – likely to force a rethink in USA on exiting. Postponement of exit is likely in case Iran gets closer to USA – so I predict that US will not withdraw completely from Afghanistan and a new political grouping with increased Iranian influence will emerge in 2014.

Did not happen. US did withdraw more than expected. New govt did come but not pro Iranian.

10. Egypt – Al Qaida/muslim brotherhood activity likely to increase.

Wrong - brotherhood finished off

Country wise economic broad and specific predictions.

China: Good GDP growth. Military expenditure and employment will grow – being unproductive, it will crowd out investment lead growth, but cause good employment generation and local consumption. Reduced Japanese and US investments likely – despite that local investments are likely to propel economic growth based on productivity increases.

Came true

Specific: Shanghai Index 2500 by year. Currency stable. Bond rates stable. Investment in Chinese stock market recommended – Mirae China Advantage Fund

Came true. If you had invested in China, 40% return instead of my predicted 20%.

Nikkei – 18000 based on pick up of activity and near shoring of manufacturing in Japan.

Came true

Prefer China over Japan for investment

Came true

Australia –flat

Gulf – 10% growth in stocks and RE. Dubai real estate for HNI recommended over London.

Wrong. Economies in free fall, stocks and real estate down a lot

Brazil – flat. South American Funds skewed towards Mexico might perform better than Brazil focused funds.

Came true

India:

Politics: BJP win 100%.

Came true

Modi as PM 80%.

Came true

Non Modi PM (Advani/Chauhan 20%).

AAP 20 seats.

Wrong

Congress wipe out in almost all states including Karnataka.

Wrong

Lalu resurgent

Wrong

, Nitish wipeout,

Came true

Navin Patnaik steady,

Came true

Mulayam wipe out,

Came true

Maya poorer performance than expected,

Came true

Amma dominant,

Came true

Mamta steady.

Came true

Economics: 4.5 % growth

Came true with upward bias.

RBI rates: Flat for now and flat for later as well – current rates are a comfort zone.

Came true

Rupee: Flat for now, slow and steady depreciation to about 64-65 after the taper reached 40 billion repurchases. Expected nadir in May

Came true

Stock: 25000 by April 2014. One can book profit since both nadir of taper and elections are coinciding – sit on liquid funds for April-May – wait for fall and re-enter regardless of who wins in elections. If Modi wins big, 30000 by year end, If confusion, then still stocks likely to end 2014 at 25000 at least

Came true

Sectors: Secular upside in cyclical as well as defensives including FMCG – basically broad based. Go with diversified mutual funds.

Came true

Bond rates: Steady at 8.75% long term rates throughout 2014.

Bond rates came down without much RBI activity

Gold: Steady/mild uptrend to 30-31000 based on Rupee depreciation (dollar appreciation against gold will cancel out most of the gains)

Gold much lower than expected

Real Estate: Flat to downtrend of 10-15%.

Came true

RTM and ready made flats will have stagnant prices.

They also fell

Completion premium downgraded to 10% upside for UC (instead of usual 30% premium).

Came true

Without completion, 10% fall in prices for delayed flats by 2014

Came true

Best performace in real estate: Chennai and Bangalore

Came true

Worst performance in real estate: Yamuna Expressway, Dwarka Expressway, Mumbai main, Tier 2 and Tier 3 towns

Came true

Stagnant prices: Delhi, Mumbai Suburbs, Pune, NOIDA, Gurgaon.

They also fell a lot except Pune and Mumbai Suburbs

Agriculture: Flat prices for grains based on govt purchase. Vegetables stable with increased supply. Mild palmolein price inflation due to Rupee weakness – feeding FMCG price rise and slightly lower realizations

Came true

Chances of War: Pakistan and China mostly on wait and watch mode. China will increase pressure on borders if Iran and Pakistan both shift to USA – especially if NaMo is PM, since the frenzy from media will weaken India. NaMo will be forced to respond. Mature response from Namo is needed for market stability – but I expect him to rise to the occasion.

Came true

Summary of Predictions by end 2014

Dow 17000 Came true

US Bond rate 3.5% Wrong

Gold in dollars 1150-1250 with 1150 in May 2014 Came true

US REIT – 5 % returns Came true

US Real Estate – Stagnant. Came true

Brent - 110 MAJOR WRONG

Nymex - 100 MAJOR WRONG

FTSE – 10000 MAJOR WRONG

London Real Estate – Stagnant to mild 2-5% fall Came true

Dubai Real Estate – Up 10% MAJOR WRONG

Cac - 4500 Came true

Dax - 10000 Came true

Shanghai Composite - 2500 Came true but went much further up

Nikkei - 20000 Came true but did not rise as much as expected

Latin America – Down 10% Came true

Sense-x: 30,000 Came true

Gold in Rupees: 31000 Was much lower

Indian Bond Rate: 8.75% MAJOR WRONG

Indian RE: No returns Came true




ASSET RECOMMENDATIONS

Decadal

Asset of the decade: Stocks (the decade starting 2014-2024)

Asset to avoid for the decade: Gold

Yearly

Asset of the year 2014: Stocks. FD/FMP/bonds equally good. Correct recommendation

Asset to avoid for 2014: Gold and Real estate Correct recommendation

Fresh allocations for 2014: 60% stocks, 30% FMP/tax free bonds, 10% dollar denominatedCorrect recommendation

Balancing of existing allocations for 2014:

Stocks increase to 45% Correct recommendation

Bonds/Debt increase to 30% Correct recommendation

Real estate decrease/no further additions until it reduces to 20% Correct recommendation

Gold 0% Correct recommendation

Dollar denominated (non gold) 5% Correct recommendation


All in all, I think most of the final recommendations were correct

This happened despite majorly missing the oil fall and the slow fall in both US 10 year and Indian 10 year rates to very low levels. DEspite that, a majority of the events were predictable including the elections and the Syrian problems.

Let me now think about the new year predictions