Towards the end of every year, it’s customary for newspapers, magazines and TV channels to provide their readers with analyses of what happened in the year that has gone by and provide predictions for the year to come. However, at least in the field of investments, the last two years should have been enough to cure anyone of the need to read predictions and the tendency to believe in them. When 2008 was beginning, many pundits expected a somewhat dull year, but none, absolutely none, had any inkling of the kind of nightmare it would turn out to be.
A year later, we had swung to the other extreme. Predictions for 2009 were generally pessimistic. The most common idea was that, while the worst was over on the investment markets, recovery would be slow and difficult. As it turned out, both points were wrong. The worst was not over for investments — the low point came in March. And certainly, the recovery of equity assets has been anything, but slow.
So, what does the year to come hold?
At this point, there is absolutely no ground for any euphoria. Fund investors have seen value of their investments climb up to a point that is much higher than the low, but not quite the previous high. For investors, who had rushed large chunks of money into hot funds of the day back in late 2007, a good amount of losses still remain. Compared to December, 2009, a good 60-odd of 220 diversified equity mutual funds are still down by more than a quarter of their value. Some of these had stocks in their portfolios that were so far off the mark, that they have recovered very little of the value they lost and there can’t be much hope of investors ever recouping the vanished money.
Clearly, the rapid recovery of value that happened towards the middle of the year has now mellowed. Till this point, the recovery of equity values has been driven largely by the realisation that things were not as bad as feared and by the huge amount of liquidity sloshing around the globe, much of it the result of governments running their printing presses overtime.
In India, we’ve seen corporate results recover on refilling of inventory and on cutting of costs. I firmly believe that the real test is yet to come. Everything depends on how the economy does from here on.
Also, in a certain sense, the more vocal parts of the investing community has entered the same psychological zone that it was in during much of 2007. There is this enormous tendency to believe all the good news and discount all the bad news. So, when I say that everything depends on how the economy does, what is most likely to happen is that there won’t be any clear signals for extended periods of time, but given excess liquidity, it will be easy to talk equity prices up during these phases. This will be interspersed by bouts of panic as we saw briefly during the Dubai crisis earlier.
For mutual fund investors, it will be best to focus on making stable investments in large-cap funds and avoid getting carried away by either the euphoria, or the panic.