Expectations for 2012

As I sit down to write this note, the Sensex is down 24% for 2011. Equities have been the worst performing asset class and the reasons are clear and adequately reflected in a situation where market sentiment has been weak and investor interest quite indifferent.

The question often being asked is what went wrong in 2011? The economy was managed poorly, fiscal prudence was non-existent and reforms went into neutral gear. If that was not bad enough, corporate corruption was rampant. By any stretch, it was an awful year  for equity investors. In the midst of all, what can one expect from 2012?

To my mind, we are in a spot on both the economic  and political fronts. Our currency is dangerously above the Rs 52 levels against the dollar. The government cannot afford to indulge in populist welfare schemes when its purse is strapped. There is very little option but to bring in more reforms on the back of some serious pressure to disinvest. What has been most worrying is the political paralysis which needs to be addressed at the earliest. The hope is that economic sense will prevail after the crucial UP elections in 2012 and some economic legislations could then see the light of day.

One of the most talked about measures has been the GST. It is apparent that this will go through sooner than later. If the implementation of VAT had a positive effect on the GDP, it is clear that GST too will have a similar impact. Once it is implemented, the simplified tax structure will move businesses away from the parallel economy which, for long, has resulted in tax evasion.

In terms of the monetary policy, 2011 was the squeeze year when there was a shortage of liquidity and soaring interest rates. One anticipates that there will be less pressure on the system in 2012, which will infuse liquidity back in the system. This process may take time and the benefits will slowly be felt.

For now, the stock market could witness another rough ride accompanied by irrationality as well. Investors may miss the positives and their decision will be backed more by fear and less by logic. The way I see it, what has gone past in 2011 will ready us for a better 2012.

Happy investing during 2012!

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