These are difficult times. Not just for the world economy as a whole but also for any one venturing out to make predictions on economic issues. In a sense, even attempting to predict economic factors over a period of 12 months is foolhardy. But allow me to be brave enough.

2009 is not going to be an “also ran” year. For starters, there will be a new government both in India and in the USA. Apart from this very significant factor, there are a host of other factors that will decide the future course of events. Not all of them will impact India and the world in a similar fashion. I will enlist them before I may make any predictions.

ISSUES WHICH ARE EXCLUSIVE TO INDIA

POLITICAL: April-May will be crucial. The economics of UPA and NDA are not very different from each other barring minor details. Hence any stable coalition should be fine. The worst case scenario is a hung parliament with the third front partners getting a good number of seats in the Lok sabha.

GEO-POLITICAL: After the Mumbai attacks in the last week of Nov’2008, the geo-political risk for Indian economy has gone up multi-fold. With the civilian govt in Pakistan increasingly turning a puppet in the hands of military and the ISI, future looks worrisome. India has its options but exercising any of them with an aggressive stance is not practical. In my assessment, India will continue to have anxious moments throughout 2009.

PRICE OF CRUDE: Nothing demonstrates the absurdity of the futures trading in global commodity prices better than crude oil. From $147 to $47 in matter of months. Are we to assume that demand supply equation for crude changed by 300% in this period? Similarly, nothing in the world can stop crude from peaking again during 2009 and India can be held hostage to a fiscal-drain.

INTEREST RATES: India’s good times during 2002-2007 were largely driven by low interest rates. It is easy to assume that they will now come down but let us not forget that they are dependent on inflation which in turn is dependant on global commodity prices and monsoons in India, both of which are as unpredictable as Yuvraj Singh’s batting form.
MONSOONS: Five good monsoons in a row. Will the 6th one in 2009 fail? Around 20 % of India’s GDP is accounted by agriculture. In the backdrop of lower manufacturing and services growth, failure of monsoons will be suicidal and will wipe out rural demand.

GLOBAL OUTLOOK

In one word- bleak. The developed world has been living beyond its means for far too long. What is more worrying is that they have also exhausted most of the options. Interest rates are so ridiculously low, that they can’t be lowered further. Fiscal packages have been announced and they did nothing spectacular.
All that can be done now is to make structural adjustments and wait for them to bear fruit. That is a time consuming process and will take 2-3 years. Of course, the world will witness a couple of giant corporations going bust in 2009. And they NEED NOT BE from the financial sector and NEED NOT BE from the US.

SENSEX OUTLOOK

Stock markets are driven by three fundamental factors. They are valuations, corporate performance and liquidity. Right now valuations are VERY ATTRACTIVE and hence need not be discussed. Let us look at the other two.

LIQUIDITY: Global liquidity has been very tight throughout 2008 and there is reason to believe that 2009 will NOT BE DIFFERENT. Of course central banks all over the world will try to infuse liquidity when the going gets very tough. In my opinion, these expected interventions can only help so much. And specific to India, flow of foreign funds may not be large enough to drive the stocks upwards. On the contrary, FII holdings in India are still big enough to impact negatively in case of outflows.

CORPORATE PERFORMANCE: We have still not seen the bad news coming. We are largely an insulated economy and will react to global developments with a lag. Q3 and Q4 of 2008-9 will be very bad. What needs to be seen is how things will change in another 6 months. In my view, there is not much scope for optimism
To sum up, stocks will be largely range bound in 2009 and will not offer great gains. However, this is a good time to buy with a 3-4 year perspective.

REAL ESTATE

Real estate will be the biggest “non-event” in investment markets. And by saying ‘non-event’, I mean it may not see any great action both positively or negatively. I understand that there are great expectations of a crash in prices. But with due respects to authors of pieces predicting a crash, I humbly submit that most of these are inspired from the assessment of foreign investment banks such as Goldman Sachs, who equate global trends with Indian trends. Housing demand and outlook are distinctly different in India from what it is in the US and the European Union. In fact, the present ebbing of demand in India can be termed as SPECULATIVE NON-ACTION, ie people desisting from buying because they expect a crash. This will correct itself in 6 months when people realise that the story is not going as per Goldman’s script.

Real estate prices will see two sets of factors fighting each other. While falling economy, lower salaries and high rates will put pressure on prices of medium –premium properties, lack of liquidity and credit crunch forcing builders to scrap or delay new projects will constrain supply. In the end it will be even-Stevens. Of course, micro markets and individual localities will have their own demand supply equations which will buck the trend.

GOLD

During floods, every one barks up the nearest tree. In the money market carnage of 2008, every one (I mean institutional guys more than retail) went for gold. What will happen if the flood waters reach the branches? IF THERE IS ANOTHER BOUT OF SELLING IN INVESTMENT MARKETS GLOBALLY, GOLD WILL SELL OFF BIG TIME BECAUSE, THAT IS THE PLACE MANY ARE HIDING. Prospects for gold in 2009 are relatively more negative than positive.
In short, the State Bank of Mysore branch near Brigade Millennium will see its customer base swell. The 10.5% yield they are giving is likely to beat all other investment avenues in 2009.