Predictions for 2014

Broad predictions for USA

Politics:

Economics:

Fed:

Specfic predictions:

Europe Broad Predictions:

Politics:

Economics:

Transatlantic trade block:

Specific Predictions for 2014

Transpacific Trade Block

The Indo Gulf trade block

Other global events:

Wars

North Korea:

China Japan

Afghanistan.

Pakistan:

Syria:

Egypt

South America

Specific predictions for the world events – for 2014

Transatlantic alliance:

Transpacific alliance:

Military activity in Pacific:

Military activity in Korea:

Military activity in Gulf:

Syria

Iraq

Iran

Afghanistan

x09Egypt

Country wise economic broad and specific predictions.

China:

Nikkei

Australia

Gulf

Brazil

India:

Politics:

For detailed predictions:



Economics:

RBI rates:

Rupee:

Stock:

Sectors:

Bond rates:

Gold:

Real Estate:

Best performace in real estate:

Worst performance in real estate:

Stagnant prices:

Agriculture:

Chances of War:

Summary of Predictions by end 2014

ASSET RECOMMENDATIONS

Decadal

Yearly

Balancing of existing allocations for 2014:

I am making this briefer than last year because the main problem is the Indian elections. Everything else depends on that. I have already written on elections.Not much to happen. Budget issues should go through with wranglingSlow improvement throughout 2014 is likely. Jobs will keep growing as the workforce retrains. Corporate investments will continue to be slow and the 2 trillion cash pile with corporate will still not get fully deployed.Likely to pause taper after the bond rate reaches some 3.25 to 3.5 5 and then keep rates at around this level for the remainder of 2014. Short term rates will remain 0. Probably the comfort level for the bond rate is likely to be achieved around 40 billion repurchases per month levels and this should be achieved around April 2014.Stocks – stagnant. Dow 17000 by end of 2014.Bonds – slow fall to bond rates of 3.5% or so, as targeted by FedDollar strong. Dollar index 83-85 by end of 2014REIT – Expect about 5% annual return from REITS.Real estate – stagnant in both old and new areas after recent run upGold – stagnant at about 1150-1250 range.For Indian investor: US market can be completely avoided, with the sole exception of US REITS for the sake of 5% dollar denominated returns.Conservatives and Christian Democrats continue in West Europe.Slow grind without too much out performance by both UK and German companies. Steady migration of East Europeans into both these economies should help achieve 3-4% growth for 2014. France less than these two. Italy slow improvement in manufacturing. Spain and other lower country Europe stagnant. East Europe good steady growth of 3-4% based on better jobs for their population, increased training levels and also based on remittances from expat workers.This is a major development for 2013 – and presages increased economic co-operation between the North Americans and the Europeans. UK sitting in the middle is likely to be the biggest beneficiary of this future development of a 40-50 trillion GDP economic superpower which is well on the way to being created. This development dwarfs all previous trade zones and will bring great economic benefits. Central to this trade block is the export of energy from USA and the export of engineering technology by Germany. This trade zone is likely to benefit from the upward migration of the Eastern Europeans and the Southern Europeans to higher levels of productivity and will involve increased transnational labour movements in the technology, health care and services sectors. A resurgence of manufacturing in USA is likely to be seen, based increasingly on Mexican workforce moving from 10000 to 25000$ per capita per annum productivity. The world has not yet realized that this massive economic co-operation zone is being created as we speak and that it is this trade zone which will dominate the rest of this century, not China.The existing Euro zone is destined to break up because of high differences in productivity levels and work cultures – and the transatlantic trade block with individual treaties by each country with major partners is likely to replace the Euro zone. This is a major change in global economics and an early spot of these changing trends can make you a great deal of money. It is not possible for one central bank to set policy for 2 zones with different productivity – that is the main realization which has dawned from the Euro crisis. It is unlikely that Germany and Netherlands will give up their central banking independence for increased trade when the same trade is equally possible over a larger transatlantic trade block with reduced barriers and more advantageous trade agreements.UK is likely to be the epicenter of the transatlantic trade block and will greatly benefit economically- once again underlining that the English, who kept Bank of England and their own currency are an intellectual super power who have outsmarted the entire world for the past 250 years and continue to dominate even now. Ports and logistics will benefit greatly – UK, Denmark, Norway and Netherlands will all get a piece of this massive cake.In a way we are harking back to the economics of 1830 to 1870 when Victorian Britannia ruled the waves and the great economic expansion of Europe took place. The basic building blocks of such an economic transition and expansion are on the cards. There has been a 20 year stagnation in productivity of Europeans and Americans. It is likely that better trade, removal of barriers, more manufacturing automation will change this. Germany has already shown the way and rest of Europe and mainland USA is likely to follow. Per capita GDP by 2030 might be 75000 dollars per capita per annum in constant dollars i.e. a 50% increase in productivity of existing population. Add to this a 20% increase in population due to migration of Mexicans and Eastern Europeans over this time period means a 70% increase of total output from 30 trillion to 50 trillion dollars.If and when Germany leaves Euro, there will be a dramatic 50% response from German stock markets with Dax touching 15000 levels. If UK leaves Euro zone trade restrictions, then again, a dramatic 50% response of FTSE to 12000 levels.UK: Stocks up. As the block takes off, a spike in FTSE upto 10,000 might occurUK: Real estate flat. Prices have already run upUK: Banks up. Bank of England rates stable for next year with no policy changes for nowUK Sterling: likely to strengthen further by 10% over 2014.Germany: Stocks flat. Euro zone rates from Draghi likely to be stable.Euro is likely to weaken over 2014 as and when the fissiparous tendencies take hold.This is the other major trade block which is taking shape, more specifically directed against the Chinese Axis. Likely to be a military-political-economic alliance between Japan, USA, South Korea, Taiwan, Singapore, Malaya, Indonesia, Australia and Vietnam. Apart from the US production of 15 trillion already counted with the trans atlantic alliance, this includes 5 trillion of Japan, 1.5 trillion of Korea, 1.5 trillion of Australia and 1 trillion of Indonesia with the rest small change adding up to another trillion. Assuming growth in Japan GDP to 6 trillion, that means 10-12 trillion of GDP which is one and a half times that of China.Japan and USA would love to include India within this block but Indians so far are being stupid. Japanese overtures, including the recent visit by the emperor in this regard are however very important. If we get NaMo as PM and republicans in next US elections, then India will be a full partner within this alliance. But if the democrats win and we have a third front in India, then India will get bypassed once again.These changes will undermine the existing economic blocks in which China has influence – the Japanese investments in Chinese manufacturing, Taiwan investments in mainland China and the South East Asian trade, This trade block is specifically anti Chinese and hence India has much to gain from this alliance.This is a traditional 4 millennia old trade block – existing from Indus valley civilization, based on sea coast geography - which has been ”blocked” due to the religious divide (Hindu Muslim and Shia Sunni). Once again, if NaMo comes and if Pakistan jettisons the Chinese axis in favour of the Transpacific alliance – then this block can take shape once more after 2 centuries of atrophy under European colonial rule. The shifting sands in Iran are key to this – the cooption of Iran away from China might take place after recent events happening with USA – Iran’s big deal.Traditionally the Persian Gulf with Oman, UAE/Dubai, Basra/Kuwait, Iranian coast, Karachi and the Kutch ports had been a major trade zone – the biggest in the ancient world. Currently Iran with 500 billion, Soudi with 800 billion, UAE with 400 billion and others with 2-300 billion GDP are mainly oil based economies. Trade related (non oil) GDP of these countries are maybe 500 billion in aggregate, including the contribution of Kutch and Karachi. By 2030 this can quadruple to 2 trillion dollars exclusive of oil. Add to this the transshipment of oil from central asia (Khazakhstan, Azerbaijan, Turkmenistan etc) and the potential increases to about 3-4 trillion dollars of new GDP over and above existing GDP. That makes it a great growth area.More importantly the UAE i.e Dubai and Abu Dhabi coast sitting in the middle of this zone and ready to offer peaceful employment to professionals and industrial workers from everywhere – mainly India especially Malayalees - are sitting on a manufacturing possibility as well. It is possible that the population of UAE might cross 15 million people by 2030 i.e double from current 8 million levels, mainly by expats – and its GDP might cross 1 trillion dollars. Peace in the Persian Gulf would mean a drastic lowering of the risk premium and a tripling of shipping size by 2030.Essentially, the UAE can provide a zone of peace, law and order and good governance with great infrastructure – and import the manpower from the surrounding countries of South Asia who have high population and good capabilities currently unharnessed due to poor governance – to generate wealth. The model, going on for 30-40 years, has endured well and has reached a take off potential. The recent expulsion of Saudi Expats is likely to give a ready pool for UAE to expand – and the UAE is a Anglo American controlled area – non Sunni Islamist to boot – and is likely to be encouraged to expand at breakneck pace by the Anglo American Alliance. As US moves closer to Iran and reaches equidistance from Saudi – the UAE is likely to be coopted by the Anglo Americans to be a counter weight and demonstrate an alternative model to Saudi Arabia.Political stability, peace and a major change of Iranian, Pakistani and Afghan mind set is needed for this development. Currently things are hanging in the balance – in all 3 countries.Of these, the most mature and advanced mindset is in Iran, thanks to its history. The Khomenian regression seems to have largely run its course. Recent deft handling of the nuclear crisis portents well for Iranian integration.Afghanistan and Pakistan are unbalanced and very poor states. Poor education levels of Afghanistan mean that it can never benefit from the trade – and hence it is likely to be a spoiler.In Pakistan, a shift in the balance of power away from Punjab and towards Sind and Karachi will be resisted by the Army. But large number of capable professionals can still tilt the balance. My own estimate is that Pakistan will not change or will change after many years – maybe 5 + years and only after an economic crisis.So the push for this block has to come from Indo Dubai and Indo Iranian Central Asian energy pipeline spearheads – with Anglo American support - which can only happen with good leadership from the like of Modi. Socialists (third front/AAP/ Congress/Communists) are not capable of such vision – India under these have always had poor vision in commerce and foreign policy.The chances of any of this happening in 2014 are basically nil. But for the first time, the potential has reared its head thanks to the recent Iranian shift – and this fluid situation is worth watching and India’s foreign affairs ministry should try to influence this. Setting up Indo-Dubai Free Trade Zones in Gujarat, Maharashtra and Kerala would be the logical step to access large quantities of capital and also to restart the manpower training of Indians – we badly need to train our workforce.1.x09: I am downgrading Iran as flashpoint – but renewed Shia Sunni fight for dominance in Syria and efforts by Sunni Pakistan to export nuclear technology to Soudi Arabia continue to be dangerous. Hopefully the UAE’s economic performance will persuade Saudi to look for economic rather than religious dominance, but seems difficult for now. Saudi with 800 billion in output is still the richest and most dominant economy in West Asia. 2014 is a crucial year to see future direction of this great game – as Syria reaches boiling point2.x09Again downgrading, despite the crazy execution of the uncle. China is actively discouraging adventurism, but still, the young Un is crazy, so unpredictable3.x09– an arms race with Japan/ Taiwan/USA on one side and China on the other for dominance is now inevitable. Since Japanese capital was routed through Taiwan into Chinese manufacturing, there is going to be a lot of rerouting – India can get a piece of the cake but for now, Vietnam (bizarrely) and Indonesia have been more pragmatic in attracting capital4.x09Very crucial time for this country – the US withdrawal and Karzai leaning towards India – and the usual Indian stupidity in foreign affairs means that a dangerous civil war is looming between Karzai, sections of the Pushtu supporting him and northern alliance on one side and Taliban Pushtu on the other side. Partition of Afghanistan into a Pro-pakistan zone and a Pro-Indian zone is possible – Indian foreign policy should be directed at a favourable partition into Iran borders/Herat/Northern Alliance which is on the side of India but covers the gas bearing and oil pipeline lands – so that a central Asia to Iran gas/oil pipeline can be made which is outside the Taliban Pushto Pakistan Axis. The Rump Pushto/Taliban areas of Afghanistan with majorty of the poor and illiterate Pushtos should be kept away from the pipeline by adequate ethnic cleansing with active American, Iranian and Indian military/diplomatic/special forces CIA action. Iranian ports can be used for the export of both Iranian gas/oil and Central Asian gas/oil. Ultimate long distance aim of India for future Pakistan should be balkanization into the Pushto areas of Rump Afghanistan and NWFP as first area, nuclear defanged Punjab as second area and a new Balochistan/Sind coastal region which should gain partition excluding the Pushto populations of Karachi and Quetta (who go back into the Pushtoonistan regions by ethnic cleansing). The coast of Balochistan/Sind should become port based and integrated into the Indo Gulf trade block. This would also bring the Balochi oil and gas into the trade block. Active resistance from Pakistan and Saudi (1 trillion of GDP together) would need to be broken with CIA help. For now, let us see whether the break in Afghanistan comes along favourable or unfavourable lines – Iran is likely to be more influential in Herat than the stupid Indian blunderings – and Iran is a much better player than India – so easiest prediction is a convulsion in Afghanistan in 2014 with a semi partition – and civil war.5.x09By middle of 2014, the main transpacific alliance would be at logger heads with the Pakistan China Axis – and Pakistan would have to choose sides. I have no clue which side they would choose – but Pakistanis are cleverer than Indians and would play their cards smartly. I hope they would abandon their 60 year alliance with China and choose their equally long 60 year alliance with USA – but I cannot predict. Let us see how the new Army Chief behaves. Nawaz Sharif is anyway total opportunist and will go with the Army.6.x09This has gained importance. Whether the Shia or Sunni win is a big deal – because Iraqi Al Qaida is also dependent on continued strife in neighbor Syria. The recent victory of the US-Iran deal will determine future events. If they get closer together, then USA will let the Shia Baathists win against the rebels – this is a favourable event because Iraqi Al Qaida, Wahabi terror and Syrian Sunni rebels are all together and a defeat with return of peace would be in India’s best interests. But very unpredictable. I would predict US victory on the side of the Baathists in 2014.7.x09. The jasmine revolution has failed in Egypt. Unlike in India where AAP has found favour, in Egypt every event has been unfavourable. A slow withering of the Muslim brotherhood is the favourable event for India – but unfortunately the reverse seems to be happening. Egyptians are quite intelligent and a democratic and prosperous Egypt (which in the past was anti middle class like India and forced emigration of Egyptian expats like Indians) – and a resurgence of industry, services and manufacturing in Egypt would be in the best interests of India and the world. But my prediction for Egypt is turmoil in 2014.8.x09– the bursting of the commodity bubble has caused a return of inflation and poor economic performance – along with resurgence of leftists. The alliance with China is saving a lot of these countries from economic ruin – and is bad news for India and the Anti Chinese alliance. My prediction for 2014 is increased leftist activity, persistent inflation and turbulence in the region.1.x09Low key for now. German decisions on Euro Zone unlikely in 2014. No progress expected2.x09Likely to be very active.3.x09China has one aircraft carrier and second is under construction. Japan has 1+1. USA has 10+3. China and Japan are are likely to commission one more each. USA is likely to reduce carrier groups in Gulf and shift to Chinese region. Japan and India are likely to commission many submarines – the next cold war is likely to be sea based, carrier based, submarine based, cruise missile based and drone based. Massive Japanese investment into drone technology is likely. There is already news chatter in this regard after the Senkaku islands.4.x09Increased threat perception in North Korea due to the drone technology of Japan can cause a war – 5% chance.5.x09Unlikely. USA and Iran likely to stay quiet while the small time activities of Syria, Iraq and Afghanistan sort themselves out. US likely to see which way Pakistan goes – USA or china.6.x09– slow death of the rebels is likely7.x09– slow death of the Al Qaida is likely8.x09– likely to get closer to USA9.x09– increased Al Qaida activity as USA exits – likely to force a rethink in USA on exiting. Postponement of exit is likely in case Iran gets closer to USA – so I predict that US will not withdraw completely from Afghanistan and a new political grouping with increased Iranian influence will emerge in 2014.10.– Al Qaida/muslim brotherhood activity likely to increase.Good GDP growth. Military expenditure and employment will grow – being unproductive, it will crowd out investment lead growth, but cause good employment generation and local consumption. Reduced Japanese and US investments likely – despite that local investments are likely to propel economic growth based on productivity increases.Specific: Shanghai Index 2500 by year. Currency stable. Bond rates stable. Investment in Chinese stock market recommended – Mirae China Advantage Fund– 18000 based on pick up of activity and near shoring of manufacturing in Japan.Prefer China over Japan for investment–flat– 10% growth in stocks and RE. Dubai real estate for HNI recommended over London.– flat. South American Funds skewed towards Mexico might perform better than Brazil focused funds.BJP win 100%. Modi as PM 80%. Non Modi PM (Advani/Chauhan 20%). AAP 20 seats. Congress wipe out in almost all states including Karnataka. Lalu resurgent, Nitish wipeout, Navin Patnaik steady, Mulayam wipe out, Maya poorer performance than expected, Amma dominant, Mamta steady.4.5 % growthFlat for now and flat for later as well – current rates are a comfort zone.Flat for now, slow and steady depreciation to about 64-65 after the taper reached 40 billion repurchases. Expected nadir in May25000 by April 2014. One can book profit since both nadir of taper and elections are coinciding – sit on liquid funds for April-May – wait for fall and re-enter regardless of who wins in elections. If Modi wins big, 30000 by year end, If confusion, then still stocks likely to end 2014 at 25000 at leastSecular upside in cyclical as well as defensives including FMCG – basically broad based. Go with diversified mutual funds.Steady at 8.75% long term rates throughout 2014.Steady/mild uptrend to 30-31000 based on Rupee depreciation (dollar appreciation against gold will cancel out most of the gains)Flat to downtrend of 10-15%. RTM and ready made flats will have stagnant prices. Completion premium downgraded to 10% upside for UC (instead of usual 30% premium). Without completion, 10% fall in prices for delayed flats by 2014Chennai and BangaloreYamuna Expressway, Dwarka Expressway, Mumbai main, Tier 2 and Tier 3 townsDelhi, Mumbai Suburbs, Pune, NOIDA, Gurgaon.Flat prices for grains based on govt purchase. Vegetables stable with increased supply. Mild palmolein price inflation due to Rupee weakness – feeding FMCG price rise and slightly lower realizationsPakistan and China mostly on wait and watch mode. China will increase pressure on borders if Iran and Pakistan both shift to USA – especially if NaMo is PM, since the frenzy from media will weaken India. NaMo will be forced to respond. Mature response from Namo is needed for market stability – but I expect him to rise to the occasion.Dow 17000US Bond rate 3.5%Gold in dollars 1150-1250 with 1150 in May 2014US REIT – 5 % returnsUS Real Estate – Stagnant.Brent - 110Nymex - 100FTSE – 10000London Real Estate – Stagnant to mild 2-5% fallDubai Real Estate – Up 10%Cac - 4500Dax - 10000Shanghai Composite - 2500Nikkei - 20000Latin America – Down 10%Sense-x: 30,000Gold in Rupees: 31000Indian Bond Rate: 8.75%Indian RE: No returnsAsset of the decade: Stocks (the decade starting 2014-2024)Asset to avoid for the decade: GoldAsset of the year 2014: Stocks. FD/FMP/bonds equally good.Asset to avoid for 2014: Gold and Real estateFresh allocations for 2014: 60% stocks, 30% FMP/tax free bonds, 10% dollar denominatedStocks increase to 45%Bonds/Debt increase to 30%Real estate decrease/no further additions until it reduces to 20%Gold 0%Dollar denominated (non gold) 5%