Significant developments investors need to track as they will have a bearing on market movements in 2011
The year 2010 has come to an end. Practically, this year was the first year after the world came out of the economic slowdown. This year, investors faced the side effects of some actions taken in the previous years to get the world economy out of the slowdown. The world faced many challenges to maintain the economy on a growth path and prevent it from falling into recession again.
There have been many desperate moves by regulators and central banks to maintain the economic recovery. As a result, the markets are signing off from this year on a positive note. However, there are many areas of concern still that need to be dealt with tactically, going forward.
These are some significant developments of 2010 at the domestic and global arenas, and will have an impact on market sentiment in the medium to long terms:
Euro region crisis
The sovereign debt crisis in Europe which uncovered last year was one of the biggest issues faced by policymakers this year. The crisis is so deep-rooted that it threatened the existence of the Euro currency itself. The European Central Bank along with IMF has created a large fund to support the struggling Euro region nations.
However, the concern is that this crisis is yet to be fully contained and more European countries are coming into the list. The actions and developments around this entire European debt crisis will be one of the biggest factors to track, going forward, in 2011.
US economy picks up
In the US, the concern is to maintain the economy on a growth path. The rate of new job creation is quite low and it may impact the economic growth, going forward. The Federal Reserve announced another round of quantitative easing in November to lift the economic activities in the country.
The economic activities have picked up in US during the current Christmas festival season. However, it would be important to track the various economic parameters (especially the new job numbers) in the US, going forward.
The Chinese economy is the fastest-growing economy in the world and has recovered quite quickly from the world economic slowdown. However, there are concerns regarding the sustainability of its economic growth pace, going forward. Inflation is ruling high in China which warrants a tightening in the monetary policy.
On the other hand, China is having a huge trade surplus and is currently facing a lot of pressure from other countries to appreciate its currency. The China fear has already triggered negative sentiments in the markets in 2010 a couple of times. The China factor would be another important factor to track in the medium to long terms.
This year, there has been very strong inflow from the foreign institutional investors (FIIs) into emerging markets, including India. The main reason for the strong FII inflows include the soft monetary policies in the developed countries, limited investment opportunities in developed countries, and the fast pace of recovery and growth in the emerging markets. The FIIs inflows were one of the major factors behind the sharp rise in the stock markets in emerging nations.
FIIs inflows would be another factor which will play a key role in deciding the future direction of the markets.
Inflation and monetary tightening
The inflation rate was on top of the agenda of financial policymakers in India in 2010. The price escalation which started with food articles and primary articles prices spilled over to other essential items. The Wholesale Price Index (WPI) based inflation rate went up to double digits in the middle of 2010. However, the Reserve Bank of India (RBI) did a good job to bring it back to manageable levels by implementing monetary policy tightening actions.
The RBI kept a close watch on the economic conditions and increased its policy rates and rations in smaller steps at regular intervals. The inflation rate has come down from its alarming levels. However, it is still ruling much higher than the comfortable range of around 5-6 percent. The progress of inflation and actions from policymakers will be another important factor to watch in 2011.
GDP growth rate
The domestic GDP has grown at a healthy rate of 8.9 percent for the first half of the current fiscal year. Robust sales were reported by real estate and infrastructure, transport and auto, financing, insurance, and communications sectors. The sustenance of this growth rate would be important to track, going forward, as challenges are rising in terms of a tight monetary policy to contain inflation and continuous rise in commodity prices due to domestic as well as global factors.
There is a lot of euphoria in the markets around disinvestments in public sector undertakings (PSUs). There have already been a few big ticket public offers (IPOs as well as FPOs) of the PSUs and a few more are expected to come in the near to medium terms.
The government has done a good job in marketing, timing and floating some of the big ticket PSU offers. The government has raised a decent amount of money which will go a long way in reducing the overall fiscal deficit.
Commodity price movements
The action in commodity prices is another important factor which requires proper attention as it impacts the overall economic policy of a country. The prices of commodities saw a steady rise this year across the board including agricultural commodities, industrial metals as well as energy commodities.
The main reason for this price rise is higher demand resulted by increasing demand of consumption as well as from hedging and speculation due to uncertainty in global stock markets.
Cross currency movements and currency volatility is another important factor which impacts the performance of businesses in the current globalised world. In 2010, there was a lot of volatility in the currency markets, mainly due to economic uncertainties in the world.
Analysts believe the currency markets will remain volatile with a lot of cross currency movements in the short to medium terms.