(Nipun Mehta is an award-winning private banker with many years of experience across Asia. The views expressed in the column are his own and not those of Reuters)

About a year back in November, we were at the highest ever level of the Sensex with hopes of moving higher. A year hence, as we inch closer to the end of 2011, the Sensex has fallen more than 26 pct from its peak, and then recovered a bit.

In the interim, there have been bouts of volatility, long periods of dull range-bound movements, and a lot of events and learnings from the domestic and international markets.

The biggest learning in the last year has been for the present generation of investors who would not have seen such a long period of stock market underperformance and for whom the definition of long-term has changed. For those who started investing after 2003, the last three years have been an excruciating period yielding seriously negative returns. Most of these portfolios are still a few years away from returning to green. The key lesson is, short-term is out and long-term is in, with long-term to be defined as more than three years.

The other key learning during 2011 has been for the Indian corporate sector, where some hardly ever hedged their forex exposure. It was largely perceived by these companies that the rupee would remain stable and the Reserve Bank of India (RBI) would intervene whenever there were sudden bouts of currency inflows or outflows.

This prevented several mid-sized companies from taking a forex cover with the objective of saving costs. After losing significant sums during 2011 on account of foreign currency fluctuations, risk management for forex has all of a sudden become the buzzword for companies that have foreign currency exposure. The corporate sector is unlikely to take the currency fluctuations for granted any longer.

It is gradually becoming apparent that after a few years of excellent domestic economic growth, even when the global economy was struggling, the growth momentum for an 8 pct (or thereabouts) GDP growth for the country cannot be taken for granted any more. Estimates for closer to 7 pct GDP growth for 2011-12 have already been announced by rating agencies. The decision paralysis and governance deficit within the government is at an unanticipated new low and threatens to pull down GDP for 2011-12 to 6.5 pct levels. The greater threat, however, is for the Indian corporate sector — starting to look overseas for expansion rather than investing in India, a far cry from the ‘India shining’ story that used to pull large investments from other countries into India.

(Nipun Mehta is an award-winning private banker with many years of experience across Asia. The views expressed in the column are his own and not those of Reuters)

If one were to evaluate global events of the last four years dispassionately, the subprime mess in the U.S. and the imminent debt default by Greece (and four other countries to a lesser extent) and the resultant crisis in the euro zone have virtually held the global economy to ransom.

This generation of bankers, analysts, bureaucrats, politicians or even economists, has not been witness to the kind of convolutions that governments and markets are passing through. All this has also led to credit rating agencies taking some surprising and some highly inexplicable decisions.

The outcome of this extraordinary, though not entirely unexpected, chain of events has been various out-of-the-box decisions and/or suggestions like introduction of a new tax on the rich called the ‘Buffet Tax’, an offer by Brazil to start funding the euro zone deficit (much like the tail wagging the dog), of breaking up of the EU, of easing Greece out of the EU, of issuing a new layer of ‘Euro Zone Bonds’, tranches of quantitative easing by the Federal Reserve, etc. The pendulum of risk aversion has swung so sharply that gold and more recently the dollar are the only asset classes that have performed in the last few quarters.

The uncertainty created by persistent delays in a clear decision within the euro zone has created a lot of volatility across markets and asset classes. The latest potential solution of investors taking a 50 pct cut in their investment in Greek bonds will shave off billions of dollars of assets from a few European Banks’ books and impair their balance sheets by raising a serious question mark on their overall asset quality.

Bank rating downgrades have already happened in Europe and unless governments capitalise some of them soon, an impending banking crisis is brewing in some European countries. Due to their huge exposure to Greek bonds, two of the largest French banks have already been forced to announce a 110 bln euro asset liquidation over the next few years to strengthen their balance sheets. Can you imagine the impact of such a measure on global businesses in various countries?

The kind of volatility across bond, forex, commodity and equity markets that we have seen globally over the last few months has been immense, and unknown to many, with far reaching implications. If a close to 9 pct rupee devaluation (vis-à-vis the dollar) over the last three months can create havoc amongst businesses, imagine the kind of impact on P&L a/cs, of bond price movements on profitability of some global banks, of importer or exporter revenues in case of adverse forex movement. The fact that company budgets have gone awry or government fiscal deficits estimates have increased will be apparent only after a lag. It’s best to be prepared.

(Nipun Mehta is a veteran private banker with many years of experience across Asia. The views expressed in the column are his own and not those of Reuters)

The unthinkable (for some) happened last week when the U.S. economy was downgraded from ‘AAA’ to ‘AA+’ with a negative outlook by Standard & Poor’s, one of the three large global rating agencies.

That led to an interesting situation where European economies like France and the UK are rated higher than the U.S., despite huge concerns about their financial condition. The event would undoubtedly have hurt the American ego, particularly since S&P announced that there could be more downgrades in the offing.

That this was an event that was imminent is accepted by many, but what is in store for the global economy and the Indian economy going forward?

There are several concerns that will keep haunting the central banks, the equity markets and governments around the world. These include:

-         What if the UK and France are downgraded too?

-         Will the other two rating agencies also downgrade U.S. in a few weeks’ time?

(Nipun Mehta is a veteran private banker with many years of experience across Asia. The views expressed in the column are his own and not those of Reuters)

The Reserve Bank of India on Tuesday quite unexpectedly raised interest rates by as much as 50 basis points. It was a move that shocked the street and took a lot of people by surprise. It was also a move showing aggressive intent at inflation management.

How is this announcement being viewed by the street? What are the implications of such a hike when interest rates were expected to have almost peaked?

It’s an accepted fact now that various efforts at inflation management have either been unjustifiably inadequate or completely missing. It’s also an accepted fact that much more than this being a demand-led inflation, this is a lack-of-adequate-supply led inflation or what is better known as inadequate supply chain management. Hence raising interest rates at this pace (11 times in the last 17 months) cannot achieve the kind of impact that improvement in supply through preventing hoarding or improving farm produce can.

To play good music one needs an orchestra with several musicians playing various instruments simultaneously. On the other hand what we have is the RBI alone trying to play its instrument and others (read the government) just watching in the hope that the lone musician will create the effect of an orchestra, and bring inflation under control. Merely raising interest rates will not bring down inflation fast enough.

With limited hope of inflation coming under control in the next quarter or two, one should expect more rate hikes in the coming months.

A couple of observations made by the RBI governor warrant a mention. His concern that meeting the fiscal deficit target could be a challenge, and the fact that economic growth had moderated but there is no economic slowdown. The latter observation is important as it is contrary to the observation made by several Bank heads as well as industry chiefs. If there isn’t an economic slowdown, this, and the subsequent interest rate hikes will ensure that. Importantly, the subsidy burden, the excise duty cuts, etc will ensure a higher fiscal deficit, and that can be inflationary too.

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The Indian stock markets are in such a state of nervousness these days that the moment somebody shouts ‘Boo’, it triggers a bout of panic selling.

That’s what happened when the RBI announced the anticipated rake hike or when a section of the media reported rumours about the Mauritius tax treaties being revised and capital gains on Mauritius-based funds being taxed.

With more rate hikes expected, are we headed for another prolonged bear phase? Will we see the same kind of GDP growth during 2011-12, as was anticipated before inflationary pressures and the consequent rate hikes hit the economy?

We have seen as many as 10 interest rate hikes since March 2010 but inflation shows no signs of coming under control. While the rate hikes have started hurting the corporate sector, the RBI has observed it is willing to sacrifice growth (in the short-term) in order to bring inflation under control.

Despite a good start to the monsoon, food prices have started rearing their head sharply again, indicating that inflation for the month of June is only going to rise further. It is also important to keep at the back of the mind the fact that the petroleum products price hike had been postponed due to state elections and is imminent.

Rising fiscal deficit is the other concern which hasn’t raised too many eyebrows yet. Pressure arising out of petroleum and other subsidies will ensure that cries for raising diesel, petrol and LPG prices will get stronger, thereby nudging inflation upwards. Consequently, more rate hikes can be expected in the next few months.

(The views expressed in the column are the author’s own and not those of Reuters)

There was a time when Budget day in India (typically the last working day of February) meant a good part of the country’s population virtually came to a standstill in anticipation of what the Budget had in store for them in terms of taxes, duties, price increases, etc.

Over the last few years, this has undergone a change. Hopes and expectations from the Finance Budget have reduced to an extent that, as in many other countries, it’s gradually becoming a non-event. What could Finance Budget 2011 have in store for us, for the economy, for the capital market?

The Finance Budget is essentially a CFO’s (Chief Finance Officer) report on the economy. It tends to take stock of the year gone by, tries to define the direction that it will take in future, and lists out measures which will help nudge the economy in that direction.

In recent times, the one aspect that the capital markets have keenly watched out for is whether it is a growth enabling Budget which can possibly catapult the economy closer to a double-digit GDP growth. The other key message being watched for has been the government spending on infrastructure, particularly on power, roads, ports, etc.

What has clearly been felt by the corporate sector is that despite enjoying a majority in parliament, there has been no clear direction spelt out by the government to spur growth and that the domestic economic growth has been in spite of the government. A consistently high level of inflation and a string of governance issues which have come to light recently, have led to disillusionment among the common man.

So what is the corporate sector or the capital market really expecting from the Finance Budget 2011? This will be yet another year when the corporate sector will keenly watch specific pronouncements about the government’s infrastructure spend, for steps to attract sustainable and healthy FDI into India, investments into retail, into insurance and other sectors.

(The views expressed in the column are the author’s own and not those of Reuters)

For any investor globally, the start of each year gives rise to renewed emotions of hope, greed, fear, expectations and the like, of the kind of returns they will make on investments.

In India, equity markets, real estate, gold and silver investments get primary attention. So what does 2011 have in store for us?

For a start, a good part of both global and domestic concerns of 2010 will continue into the coming year. While visible signs of a turnaround in the U.S. and European economies exist, it can be expected to continue to be grindingly slow.

This means interest rates in those economies — which could otherwise pull significant chunks of money there — will rise, but very slowly. Is there a possibility of yet another PIIGS-like crisis being thrown up in the developed world?

Looks unlikely. The huge government aid, the tranches of Quantitative Easing, etc will ensure there is unlikely to be one, at least as serious.

For the domestic economy, for the next decade, a high single-digit growth closing in on to a double-digit growth appears a serious possibility. In fact over the last couple of years, there has been a gradual but interesting change in mix of contribution of sectors in India’s GDP growth.

(Nipun Mehta is a veteran private banker with many years of experience across Asia. The views expressed in the column are his own and not those of Reuters)

3972, that’s where the BSE Sensex was on Jan 2001 at the start of the decade, it’s a shade above 20,500 at the end of it in 2010, a more than fourfold rise.  Information Technology, which was the darling of investors then, gave way to the Consumption and Infrastructure story.

Here’s a walk down memory lane and some interesting facts for the last decade and of course the last year (2010).

The last decade (2000-10) was probably one of the best for the Indian capital markets, even a shade better than the 90s decade which actually established the base for the ‘00s decade through economic liberalization. The 90s got blemished and diluted due to 2 domestic scams – Harshad Mehta and Ketan Parekh – while the ‘00s had the global sub-prime crisis that brought the world to its knees.

The difference was, the last 10 years saw access to global capital become easier for the Indian corporate sector and size multiplied through some of the largest global acquisitions by Indian conglomerates.

Risk-aversion, Carry trade, as well as sheer growth of the BRIC economies ensured that FII flows towards Emerging Markets and towards India grew multifold, creating a unique high liquidity equation.  Basically the world sat up and noticed India in the ‘00s. What could the next decade have in store for us?

(Nipun Mehta is a veteran private banker with many years of experience across Asia. The views expressed in the column are his own and not those of Reuters)

By Nipun Mehta

After the Income Tax Department standardised the use of April to March as the financial year for all accounting purposes, in India the Samvat year (as opposed to the Gregorian calendar) really lost its significance except on Diwali day. But Samvat year 2066, which ended on November 4, 2010 will be remembered in Indian stock market history for several reasons.

Samvat 2066 saw the highest ever annual FII flow into Indian markets. It saw the largest IPO ever hit the primary market. The last day of Samvat year 2066 was the day on which the key Indian capital market benchmark index – the BSE Sensex – touched its highest ever mark for the first time after the historic January 2008 highs, on a closing level basis. And on Muhurat trading day, the Sensex closed above the psychologically important level of 21,000.

But all that is history, what does Samvat 2067 have in store for us?

There are several reasons for the FII flow to continue into emerging markets and into Indian capital markets. There is also that clearer possibility of return of retail participation into the secondary markets this time around.

Firstly, it’s been more than 10 quarters since several economies, particularly the U.S. and Europe, have been struggling, while the Indian corporate sector earnings continue to show consistent growth. Emerging markets (with India featuring high on the list) continue to present one of the best options for investment, valuations notwithstanding.