The worst is yet to come - The 5 Minute WrapUp by Equitymaster
Free Reports

The worst is yet to come

Jan 2, 2009

In this issue:
» Roubini predicts more trouble
» How will the Dollar perform this year?
» Indian infrastructure gets more money
» Cement industry to suffer in 2009
» ...and more!!

The worst is still ahead of us! Atleast that is what economist at New York University and chairman of global economic and financial analysis firm RGE Monitor, Mr. Nouriel Roubini, who had also predicted the subprime crisis and its devastating consequences, has to say. According to him, 2009 will be another painful year of global recession, financial stresses, losses and bankruptcies. The credit crunch is expected to persist and spread beyond mortgages, especially credit cards. Deleveraging will continue, as thousands of hedge funds and other leveraged players will be forced to sell assets into illiquid and distressed markets, thus causing price declines and driving more insolvent financial institutions out of business.

----------- Equitymaster Research -----------
Why buying some "about-to-go-bankrupt" companies
can be the best decision you ever make.
Read On.

While Mr. Roubini may not be the only doomsayer in an economic environment riddled with uncertainties, what can be assumed with certainty by investors is that the end of the crisis is not very near. Opportunities for making long term profits have and will make themselves available during this period across asset classes and they only need to be cautiously identified. Although there is consensus amongst investment experts that the prices of varied asset classes have almost bottomed out and a rapid recovery is inevitable, the same will be subject to outcomes of several events that unfold over the medium term. Political outcomes, stimulus packages, government policies, earnings results and financial sector news from around the world will be the key defining factors.

As per a leading business daily, the Indian government plans to announce another stimulus package with an impact of Rs 1,000 bn. It will focus on investments in the infrastructure sector over the next two years. A private sector firm can begin an infrastructure project with a 15% contribution to the capital with the balance coming from the public sector.

The Infrastructure Investment Finance Company Ltd. (IIFCL) will accumulate Rs 400 bn for this purpose. It has already raised Rs 100 bn in tax free bonds and will raise another Rs 300 bn from the same. An investment of Rs 400 bn will stimulate further activity of Rs 600 bn taking the total impact to Rs 1,000 bn.

It may be noted that investments from the private sector has come down to a trickle. Hence, these steps are definitely welcome. Infrastructure building stimulates the core industries like steel, cement and engineering, which then trickles down to other industries. However, as it is so often in India, the key is not how good the plan sounds. It lies in how efficiently it is actually implemented.

The movement of the dollar is of great importance to many industries in India. Especially to the oil and gas sector, 70% of which depends on imports and the IT sector, which depends heavily on exports.

In the stock markets, sometimes everything can crash everywhere. As it did in 2008. As per the Economist, the unique feature about currency markets is that no matter how the world economy performs, some currencies go up while the others go down. In other words, it is relative. The demand for a currency depends on investors' expected returns. That can be broken down to interest rates on offer and economy's growth rate.

Source: The Economist
So what's the outlook for the dollar, relative to the other main world currency, the Euro? Interest rates in the US are at rock bottom, while those in Europe can still fall further. Growth rates in Europe are also as doubtful as in the US, if not more. Hence, the Dollar should move up against Euro in 2009.

And what's the outlook for the dollar against other currencies? As per the Economist, the flight of capital from the emerging economies to US treasury notes (Uncle Sam's word is still trusted) is also expected to push the dollar up relative to emerging market currencies - Indian rupee, South Korean won and Brazilian real.

In the last annual ranking, Forbes had pegged Anil Ambani for adding the maximum wealth. Now, the magazine has given him the top spot for having lost the maximum wealth in a list of 'Billionaire Blowups of 2008'. But he is not alone in the list. Fellow Indians - Lakshmi Mittal, Mukesh Ambani and KP Singh - join him at the top of the list.

Of course, one should not get too carried away with market caps. Just because stock quotes are precise numbers, they do not necessarily measure the worth of a company or its promoter. With India gradually adopting more free market methods, the country's entrepreneurial energy is finally finding expression. Although the liquidity bubble mistakenly attached ridiculous market caps to this story, we believe it will be an equal mistake to write off India's businessmen.

Inflation rate is now at its 10-month low. For the week ended December 20, the figure came in at 6.38% as compared to 6.61% in the previous week. The decline is on the back of declining prices in all the three constituents of the wholesale price index (WPI) - primary articles, fuel and manufactured products. Fuel contributed the most on the back of lower jet fuel and light diesel oil prices. With inflation coming under control, all eyes are now on the RBI to bring down interest rates further.

India's cement industry has had a rather unusual 2008 and the scenario is only expected to get tougher in 2009 according to the MD of ACC. The first half of 2008 was tough for ACC as its costs escalated and it was restricted from passing on these hikes to consumers; the government being vary of the high inflation levels. While inflation has cooled off, the global turmoil is having an impact on India and demand has considerably waned. To such an extent that the company has shut off one of its plants at Himachal Pradesh. As far as price cuts on cement are concerned, ACC is emphatic in saying that it does not see that happening. In fact, it is of the opinion that prices need to be increased to clear the backlog of price increases in coal. Certainly, the fortunes have reversed for the Indian cement industry, which saw one of the longest profitable cycles before 2008 began.

If given a choice, what would you buy, a stock that has fallen 54% in one year or a stock that has fallen 38% in a year? Insufficient information you would say. So let us also add a fact that the firm behind the first stock is likely to grow at a much faster pace than the second one over the long-term.

While you may still struggle to give your verdict, some shrewd investors like Mark Mobius have already given theirs, and not surprisingly, they have chosen the first stock over the other. Curious to know what stock is that? Well, it's the emerging markets index and the second one being the S&P 500 index. Mobius feels that certain companies in emerging market economies like Brazil, China and India are at their cheapest in a decade and it is this cheapness coupled with their growth prospects that will make recovery in emerging markets faster than the recovery in the developed world. And Mobius is not alone in his view. There are some other big names that are of a similar opinion. "As value investors, this is the best time to be investing" is how Mobius chose to put it across. We dare say anything different.

Most industries are having a tough time in facing the current economic slowdown. However, as per Fortune, there are 7 industries which are able to register higher sales even in these times and are therefore recession proof. These 7 industries are video games, discount stores, cosmetics, waste management companies, comfort foods, fast food companies and private college chains. Thank God for the US$ 1 hamburgers!

After yesterday's strong start to the New Year, the Indian indices saw another day of acceptable gains today. The benchmark BSE-Sensex was trading higher by around 65 points at the time of writing, led by stocks from the realty and consumer durables sectors. Most other Asian markets too saw strong gains, while the European markets also are trading in the green currently. As per Bloomberg, the rise in stocks in Europe and Asia is due to the speculation that their respective governments will step up efforts to revive the global economy.

Oil fell 5.2% to below US$ 42 a barrel, after the recent 14% gain, on concerns that a global economic contraction will hinder fuel demand. But with the stalling of the rally in crude and the strengthening of the dollar, gold declined in Asia reducing demand for the precious metal which is mostly seen as a hedge against inflation and as an alternative asset.

Today's investing mantra
"Even when the underlying motive of purchase is mere speculative greed, human nature desires to conceal this unlovely impulse behind a screen of apparent logic and good sense." - Benjamin Graham

Today's Premium Edition.

Recent Articles

Modi and Mr Market: My Verdict on Where the Markets Are Headed Now May 20, 2019
Will the bulls make a comeback after a Modi victory?
What Makes TVS Srichakra and CCL Products a Cut Above the Rest? May 17, 2019
Despite the commodity nature of their businesses, these two stocks have rewarded shareholders well.
My Top 7 Stocks to Profit from Sensex 100,000 May 16, 2019
Tanushree Banerjee explains everything you need to know about the Rebirth of India and Sensex 100,000.
The Perfect Example of a Multibagger Opportunity in the Rebirth of India May 15, 2019
A structurally strong Indian Steel Industry will help India achieve 8%+ GDP growth in the coming years.

Equitymaster requests your view! Post a comment on "The worst is yet to come". Click here!