Supporters of the India growth story would like to treat the year 2011 as a bad dream. In a departure from big gains in the past two years, investors saw around Rs 20 lakh crore of their wealth eroded as Indian equities tanked in 2011 because of inflation, high interest rates and the uncertain global growth environment accentuated by the euro zone debt crisis.
The participation of local and foreign institutions in Indian equity markets has been marginal. Fiscal deficit is likely to be around 5.5% against the target of 4.7%. In short, things, which were looking positive at the beginning of the year, seem to have lost steam and the situation looks grim.
While it is very difficult to make a guess given the uncertainty in many quarters, the equity markets seems to have substantially priced in the worst. It is trading at a PE of 12 times financial year 2013 estimates. But one is for certain and that is it will get worse before it gets any better.
Most market watchers would agree that the eurozone will hold the key to any semblance of a bull market in 2012. There was across-the-board change of the guard in 2011, as struggling European countries brought in the technocrats, or voted out governments which had failed to solve their economic crises. In 2012, there could be an even bigger shift, with several key countries facing possible changes at the top.
There is also a chance that Italy will have a new election, which could kick out the current technocratic government, if President Giorgio Napolitano fails to reverse former Prime Minister Silvio Berlusconi’s electoral reforms of 2005. Berlusconi still controls the Senate. Elections are not due until April 2013, but Italian politics are famously unpredictable.
However, the euro's dramatic slide to the year’s lows in light trading is a likely prelude to more weakening in the New Year and highlights the long haul ahead for the euro zone’s debt crisis.
On the flipside, the US economy is expected to do much better in 2012. The economy has generated at least 100,000 new jobs for five months in a row -- the longest such streak since 2006. The number of people applying for unemployment benefits has dropped to the lowest level since April 2008. The trend suggests that layoffs have all but stopped and hiring could pick up.
More importantly for us, the growth trajectory of the country will watched very carefully. And as things stand, India could definitely suffer a little bit more and market is possibly taking that into account right now.
Next up, would be the tattered condition of the government coffers . The Centre will need to be more proactive in terms of addressing investor concerns and provide more clarity as to how they plan on controlling the ballooning deficits of the nation.
The Reserve Bank, meanwhile, announced that India will borrow an additional Rs 40,000 crore through dated securities in the current fiscal year ending in March.
With Iran threatening to cut off about a fifth of the world's oil supply by closing the Strait of Hormuz and unrest in Iraq endangering the ability to increase production there, financial analysts say prices for two important oil benchmarks will average from USD 100 a barrel to USD 120 a barrel in 2012.
But the joker in the pack will definitely be the Indian rupee , Asia's worst performing currency this year. If the US dollar gains against major currencies, it is bound to gain against the rupee. And the outlook, for the short-term at least, suggest that the global demand for the US dollar is expected to stay strong.
Let's us hope the RBI has more tricks up its sleeves in 2012.