After a long battle of three years the Stimulus power is fizzling out and all the world economies are shrinking. But can our country come out as a winner, answer is YES.

The Paradigm Shift will take place and soon we will see the shift of Economic Power from West to East. The status of Developed Countries like US, UK & Rest of Europe is very grim. Here the Emerging Economies will take the lead specially India, China, Brazil, Russia, South & North Korea, Thailand, Malaysia barring Japan.

First we will see the status of Equity Indices all over the world after the 2008 turmoil:

Indices 2nd Dec 2011 High (2008) Low (2008) Down from 2008 Peak (%)
Dow Jones 12019.40 14198.10 6469.95 15.35
S&P 500 1244.28 1576.09 666.79 21.05
FTSE 100 5552.29 6950.60 3460.70 20.12
Nikkei 225 8643.75 18297.00 6994.90 52.76
Hang Seng 19040.40 31958.40 10686.30 40.42
Shanghai SE Comp 2360.66 6124.04 1664.92 61.45
BSE Sensex 16493.98 21206.77 7697.39 22.22
S&P Nifty 5050.15 6357.10 2252.75 20.56


Most of the indices rallied on the back of Stimulus Packages by Govt. but now the slippage has started when the GDP is contracting. Now we will try to discuss and analyze INDIA & CHINA and how the Paradigm Shift will take place.


Our equity index almost fully recovered after touching 2008 lows but now the 8% GDP figure is looking tough. The PSU banks heavily distributed money among corporate world which created a mirage effect in economy. Now one can see the clear picture but Don’t Worry – The Consumer Power and Consumption of India will remain strong. Half of the total population falls in the category of Young Earners which will keep the engine running.

We will easily meet the disinvestment target which will eventually reduce the Fiscal Debt, only the Policy Reforms of Govt. is on the slower side but it will happen. WPI Inflation is haunting us but the base effect will help in reducing the level after March 2012. RBI hiked Interest Rates many times but this supply side Inflation could have been controlled by good reforms of Govt. but it didn’t happen.  But for the time being the Interest Rates are peaked out so there might not be any more increase.

I feel some more contraction in GDP can happen around 6.5% – 7% for FY12 due to laggards in Manufacturing, Mining and Construction Sectors.

In this year alone FIIs pull out around 19000crores from our Equity Markets and Rupee already depreciated to the level of 52 against Dollar.

After a huge selling now there is lot of value in some of the sectors which could emerge out strongly when the next bull era will start.

Indian Sectoral Snapshot

Indices Index as on 2 Dec 2011 1 Year Avg 5 Year Avg
Auto 8643 8883 6368
Metal 10639 14658 13678
Power 1953 2536 2800
Reality 1619 2100 4180
PSU 6942 8416 8130
Oil & Gas 8284 9324 9614
FMCG 4069 3742 2788
HC 6029 6150 4701
CG 9769 12950 12950
Bankex 10223 12135 9681
IT 5582 5932 4567
Midcap 5682 6750 6303
Smallcap 6125 8090 7722
Sensex 16493 18152 16232
Nifty 5050 5443 4867


Applying the simple logic after looking the above table, the index in red is looking heavy against the 5-year average so here I would concentrate on the sectors which are trading below 5 year average for investment with stock picking approach. Rest of the sectors I will wait for some correction.

Specially I feel the value could emerge in Oil & Gas, Metals & Reality in the long run.

There is one more concern the debt carrying by companies either from Indian or foreign banks, most of the debt is getting matured in first half of 2012 which needs restructuring.  So the corporate earnings will remain under heavy pressure and the third-fourth quarter FY12 might bring some more losses due to hard Interest Rates, Low Operating Margins and Currecncy Hedging.


A whopping double digit 10% GDP country is really a block buster growth, but here I would see a pause before a big rally.

Can you imagine a 30% credit growth of Chinese Banks? This is remarkable but this communist nation made lot of bubbles in Real Estate and Banking which is bursting out now. There would not be a big effect on Equities because Chinese equity market didn’t surge much after 2008 turmoil.

China & Base Metals

There is big link between Base Metals Consumption and Chinese Growth, all the base metals had seen a super cycle from 2000-2008 and major contributor is China. Huge infrastructural growth made an unprecedented demand for metals.

Just see this table which shows the Inventory Levels in metric tones from 2001-2011:

Base Metals Dec-01 Jan-04 Nov-06 Jun-08 Feb-10 Dec-11
Aluminium 700000 1400000 700000 1000000 4500000 4557650
Copper 800000 500000 150000 150000 550000 386700
Lead 100000 1500000 50000 100000 170000 369250
Nickel 20000 36000 5000 50000 160000 91074
Zinc 400000 7500000 100000 150000 510000 741350


This growth has already taken a halt when Chinese Banks tightened a nooze on lending, this applied brakes on the rising prices of metals. The inventory levels also may remain subdued for some time.

Base Metals  Inventory Trend
Aluminium Heavy Down
Copper Marginally Down
Lead Marginally Down
Nickel Marginally Down
Zinc Heavy Down


The 2012 might be a dull year for China but after a slight slowdown it will again roar and emerge as Super Economic Power.


US equity markets rallied quiet a lot and more poised now before a big fall. US is a giant despite a double digit unemployment, hardly 2-2.5% GDP forecast still stocks in the US holding on. But after 2012 the US equity market may see a very long dull phase which would certainly take the US economy in Recession.


A big recession has already started and debt crisis is showing its ugly side now.

In my 13th July’s last article I have already predicted and discussed the vulnerability of PIIGS countries.

Now take a look of EURO Debt and the possible outcomes for this debt. The top nine debt stricken countries are –

  • Greece Debt

Money received from countries in billion $ Dollars:

  • France – 55.7
  • Germany – 21.4
  • UK – 12.6
  • Portugal – 10.1
  • US – 8.4


  • Italy Debt

Money received from countries in billion $ Dollars:

  • France – 416.4
  • Germany – 161.8
  • UK – 73.7
  • Netherlands – 52.10
  • US – 46.9


  • Spain Debt

Money received from countries in billion $ Dollars:

  • Germany – 177.5
  • France – 150.9
  • UK – 100.9
  • Netherlands – 77.5
  • US – 66.8


  • Portugal Debt

Money received from countries in billion $ Dollars:

  • Spain – 88.5
  • Germany – 35.9
  • France – 25.7
  • UK – 25.4
  • Netherlands – 6.7


  • Ireland Debt

Money received from countries in billion $ Dollars:

  • UK – 140.9
  • Germany – 110.5
  • US – 53.6
  • France – 32
  • Belgium – 25.4


  • Belgium Debt

Money received from countries in billion $ Dollars:

  • France – 229.5
  • Netherlands – 120.2
  • Germany – 37.5
  • US – 34.2
  • UK – 18.4


  • France Debt

Money received from countries in billion $ Dollars:

  • UK – 305.30
  • US – 271.70
  • Germany – 223.3
  • Japan – 107.2
  • Netherlands – 103.2


  • Germany Debt

Money received from countries in billion $ Dollars:

  • France – 277.1
  • Italy – 272.9
  • US – 234.7
  • Netherlands – 200.5
  • UK – 190


  • UK Debt

Money received from countries in billion $ Dollars:

  • US – 779.6
  • Germany – 511.2
  • Spain – 426.7
  • France – 282.9
  • Switzerland – 208.7


If we study the debt structure then France is the biggest lender for Greece, Italy & Belgium and all the three countries are on the verge of default, henceforth France would be on the brink of danger. The spiral of danger will further move to Germany & UK. So overall picture is getting worse and the final point is US.

Debt Virus

Greece   Italy   Belgium                                 France                                          United Kingdom

Spain Portugal                                         Germany                                       United States


This chain reaction could cause an implosion of Europe’s $41 trillion banking nexus (S&P Estimate), the world’s biggest and most leveraged. This in turn risks an almighty global crash.

Still ECB president Mario Draghi, German Chancellor Angela Merkel & IMF chief Christine Lagarde tried lot many options like-

  • Issuing Bonds but could not attract buyers fully which kept bond yields elevated.
  • Cheap Dollar financing through dollar swaps by Fed
  • EFSF Fund of $1.4trillion

On Dec 9 ECB officials are meeting again to clear out the fund plan but here I want to mention that all will falter because the Germany & France both are reluctant to shell out more money.

Now what could be the possible Scenarios & Consequences –

Scenario 1: If ECB & IMF want to keep the weaker countries alive then they would have to keep them funding by restructuring their loan term.

Outcome: Each and every time the new bonds will come in picture before maturity but as we are seeing nobody is interested in buying bonds so all the Bond Yields will remain high which ultimately hints sovereign default.


Scenario 2: If the default happens of weaker countries then these countries would have to exit from EURO currency & onetime hit to German-French Banks. In this case the Ratings of Germany & France will also get reduced.

Outcome: All over the world the liquidity will get freezed by defaults so all the bigger unions are trying to avoid this bust.


Scenario 3: Debt Monetization – ECB can print money but Germany will not support it for sure.

Outcome:Printing currency could cause very high inflation and excessive damage to German & French economies. Already the M3 supply is high so this option could be deadly.


Scenario 4: GOLD but How?

Overall the credibility of Germany and France is on stake, in 1999 Germany for her vested interest made one single currency to boost the exports now the danger of default could also lead them to take a shrewd decision to allow weaker countries exit from EURO currency. I feel the Scenario 2 is quite possible.

Moreover the Credit rating agencies cut the ratings of bigger US & European Banks which exposed the risk of Bank default, most precarious would be French & Italian Banks.


What GOLD could do in this EURO Debt Crisis (Scenario 4)

First we will see who owns the biggest reserves of GOLD in the world.

Rank Owner Tonnes Share of Foreign Reserves
1 US 8133.5 78.30%
2 Germany 3412.6 69.50%
3 IMF 3217.3 N/A
4 Italy 2451.8 66.50%
5 France 2450.7 72.60%
6 SPDR Gold Shares ETF 1120.6 N/A
7 China 1054 1.80%
8 Switzerland 1040.1 37.10%
9 Japan 765.2 2.10%
10 Netherlands 612.5 61.40%


Till now GOLD already crossed a rate of $1900/ounce in Aug 2011. Now as per the above table top five rank holders own the highest reserves of GOLD who also has running with high Foreign Debt.

Nothing can give Infinite Returns but till now GOLD acted as back up for major currencies so it is definitely a Reserve Currency. This is why we have been witnessing a sharp long bull era of GOLD.

What we have seen that the Trio of ECB-Fed-IMF trying all possible options to come out of this mess but nothing successful yet. The next step this Trio could do is

  • “Issuing Gold Back Bonds” because of the strong reserve and price GOLD could save them and could act as Savior for their EURO currency also.

 Result: This can further increase the value and price of GOLD.


  • Sell Gold reserves and finance the debt if they want to avoid “Defaults & Money Printing”.

Result: This could be fatal for GOLD and would lead to an end of long bull era.


After the abolition of Bretton Woods system in 1973 GOLD made a spectacular move from 1990 to 2011. But I want to mention one event happened in 2001 when Bank of England just dumped tonnes of Gold. Could this happen again?

I feel one should reduce the position of GOLD and next 3 years could be tough for it. Possible level for Gold $1300/ounce.


The Future of EURO & Dollar Currency

Frankly speaking there is a hardly a hope left for EURO, if there would be any break up then all gone.

Dollar is dominating all the hedging interest of Funds and Banks all over the world, this is why GOLD’s tag of Safe Haven is temporarily shifted to Dollar, anyhow US is desperate to protect the treasury so for time being  DOLLAR might dominate the world currency market.

But there would not be much hope beyond 85 for Dollar Index against six currencies. The debt monetization will eventually destroy the value of Dollar.


The black gold would also remain in limelight, I feel the Geo-Political tensions will keep blocking the supply of CRUDE.

I have already discussed in my March 2011 article about CRUDE, I still feel the level of $150/barrel will get breached next year.


  • Indian Equity markets may see an another round of correction and probable levels could be 4200-3800.
  • Do not wait for Index correction start buying where we see the VALUE.
  • Among BRIC nations India & China would be favourite destinations for foreign funds.
  • First half of 2012 might be very turbulent for equities then we might see a recovery in second half.
  • A possible banks default either in EURO or US, sovereign default is also possible which would eventually get the EURO break up in the first half of 2012.
  • Dollar might see a rise upto 83-85 level against six currencies then a crash upto the levels of 1991 in next 3 years.
  • CRUDE might go upto $150-170/barrel in 2012.
  • Gold could crash upto $1300/ounce.

In this way I would see a FOCUS and Power shift from West to East so a perfect “Paradigm Shift”.


Disclaimer: In this article all the opinions and predictions are my personal and it has no relevance or connection with any of the report and views of any broking/equity research company.



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