V. Anantha Nageswaran
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Photo: Spencer Platt/Getty Images/AFP I am writing this column with the full awareness that I had not come anywhere near predicting that the Standard & Poor’s 500 stock index would crest 2,000 points. Having gotten stocks, oil and gold wrong in the last two years for the most part, I venture to write the outlook for 2015. If one scoured through the headlines over the weekend at, say, www.prudentbear.com , one would have noticed their grim tone. Dow Jones stock index has had its worst week since 2011. Qatar stocks entered a bear market and Dubai erased gains for 2014. Greek bonds had their worst week since the euro crisis. The 10-year Greek government bond yield was as low as 5.57% early in September and, as of Friday, it had reached 9.15%. It appears that, for most participants in financial markets, the planet Saturn is transiting through the eighth house of their horoscope.
The United Arab Emirates had noted that the Organization of Petroleum Exporting Countries would not budge even if the price of crude oil were to drop to $40 per barrel. That was an interesting observation. I had noted previously that the pain threshold for most shale oil production was $42 per barrel and not the higher figure of $80 per barrel, cited often. Clearly, major oil producers who are allies of the US are willing to let the price of oil drop to as much as $40 per barrel. There is ample scope for the law of unintended consequences to take effect here. Big risks for global financial markets in 2015 will be Europe, China and a US stock market crash, and not necessarily in that order. The European crisis is far from over and anti-European sentiment is rising in many European nations including in Italy.
The outcome for the single currency, especially if the European Central Bank proceeds with some form of asset purchases with Germany being a reluctant signatory to it, is far from clear. Obviously, EUR/USD at around 1.25 is still expensive. So are European stocks at current levels. The surprise pocket in the past four months (until last week) has been China stocks. They were down for the year until the first week of August. However, to my surprise, Shanghai and Shenzhen stock indices had rallied hard in the next four months and were up by about more than 40% year-to-date in end-November, eclipsing the performance of stocks in India and Indonesia, which have been the star performers in Asia until then. China’s outperformance is rather bizarre and inexplicable. Most commentary has cited monetary policy easing by the People’s Bank of China as the reason for the rally in China stocks.
I remain unpersuaded. The collapse in the prices of many commodities that serve as raw materials in the production process are clearly suggestive of Chinese overcapacity and pruning of production. For household consumption to replace investment as the driver of economic growth, employment and income gains have to be strong. There cannot be a seamless transition from investment led growth to consumption led growth without a rather painful interlude. My outlook for China economic growth and China stocks is rather negative. The threat of a substantial depreciation of the Chinese yuan is non-trivial too. The US economy has been held out to be the lone exception by many. Yours truly has been a sceptic of that narrative. Its employment generation record, especially since 2009, has been far from stellar.
Creation of low-paying, long-hours jobs have only confirmed the stark inequality that characterizes the US society. It is not a surprise that Financial Times has picked Thomas Piketty’s book on inequality in the 21st century as the best business book of the year. He should dedicate his award to Wall Street firms and to the US Federal Reserve. US stocks sport unreasonable valuations, having been driven higher by quantitative easing, stock buybacks, earnings manipulation and suspension of mark-to-market accounting. The dollar is clearly a better currency than the euro but that is not saying much. A US stock market crash in 2015 is a much bigger risk than what Wall Street strategists would have you believe.
India has had a political turnaround in 2014. The government has indeed moved to restore the economy to normalcy on several fronts. More could have been done. Perhaps the ruling party is focused on consolidating its political gains first before unleashing big structural reforms. The fall in the price of crude oil is a big bonanza. As Ashok Malik wrote recently, India should try to lock in these prices for the long-term. The big surprise for 2015 could be a swift turnaround in the price of crude oil in the second half of the year. India remains better placed than most nations. Whether its stock market can continue to advance in the absence of global tailwinds is another matter altogether. The biggest risk for the existing order is not China replacing the US at the top of the table, but the global economy, markets and politics going leaderless. That is the big risk for 2015. I retain my faith in the yellow metal. V. Anantha Nageswaran is co-founder of Aavishkaar Venture Fund and Takshashila Institution.
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