The Hindu Business Line : 2007: 2006 or Better

As far as emerging markets are concerned, the prognosis is for the good returns to continue, riding on the bandwagons of China's and India's growth stories.

What, in fact, gives market-watchers the creeps is that the vast majority of investors see better times ahead - often a bear signal.

Will it be different this time? What underlines the confidence?

Clearly, it is the consumption and investment appetites of households and businesses.

Vast numbers of the poor are graduating to the middle class and vast numbers of the middle class are becoming rich. That has set off a consumption boom.

Technology keeps attracting new investments in communications, computing hardware and software and entertainment and new ways of doing business online.

Infrastructure — energy, transport, roads, airports and social sectors like education and health — is also going through an investment explosion. Land, residential and commercial properties seem to be in short supply judging by their price explosion. To summarise, a global boom of an order and magnitude not seen before.

Nothing has scared economies and markets — not expensive oil, commodities, terror attacks or geopolitical tensions. Are we in incompletely uncharted territory?

More promising

If anything, 2007 looks more promising than 2006. US interest rates are likely to remain stable at worst, with a good chance that the Fed will cut once inflation risk is out of the picture.

The ECB, Bank of England and Bank of Japan are likely to hike rates but their actions will not impact the growth momentum. Corporate profits are so high and liquidity so comfortable that marginally higher interest rates will be shrugged off.

One's forecast for 2006 was a robust global and Indian economy, steady to falling energy prices, rising stock markets and bond yields. (See Business Line, December 28, 2005). While the first three predictions were largely correct, US bond yields fell in the course of last year, despite increasing Fed rates.

There seems no reason to materially change 2006's forecasts.

Bad year for bonds

Stocks will continue to rise but it could be a bad year for bonds. Even if Fed rates fall, it will not be necessarily positive for bonds. Softer oil prices will deliver a stimulus both for consumption and new (non-oil) investments, driving yields upward, even as inflation remains in a narrow range.

This applies even more so for domestic bonds, which should see the 10-year benchmark gilt yield increasing to 8 per cent.

The global growth march will continue, even if accompanied by occasional bouts of volatility in financial markets.

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