Are We Nearing The End of Global Recession?

Sep 4, 2009

In this issue:
» Global recession ending says OECD
» Gold flirting with the US$ 1,000 per ounce mark again
» Disinvestment through FPOs and not IPOs
» Late recovery by monsoons
» ...and more!!

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In a recent issue, we had discussed the difference in opinion between investment banks and hedge funds on the question of whether the global recession is ending. Investment banks believed a recovery is coming through, while several large hedge funds didn't.

Now, the club of rich industrialised nations, Organisation for Economic Co-operation and Development (OECD) has joined the debate. And it agrees with the investment banks. OECD says that the global recession is coming to an end faster than thought a few months ago and may in fact already be over. It believes the turnaround started in the emerging economies, especially China. However, OECD cautions that the pickup in economic activity continues to be dependent on government stimulus packages. Also, despite the improvement now in sight, OECD expects a contraction in GDPs of the major industrialised nations for 2009 as a whole due to the poor first half.

In our opinion, the optimism is not warranted at this stage. There are still genuine worries over unemployment data and housing prices. As Wilbur Ross, the investor famous for acquiring and turning around failed companies, recently said, "People are so desperate to hear positive news that they are drawing cheerful conclusions from negative data".

Staying on the issue, quite a few titans of the investing world have already given their verdict. 'We are not out of the woods yet, certainly not in the US', that's the mantra they are chanting these days. In fact, author and fund manager David Dreman has recently warned that the huge dose of liquidity that has been injected into the world economy will resurface in the future as inflation.

Is this the reason the precious metals gold and silver are back in vogue these days? After about a breather of few months, gold has started flirting with US$ 1,000 per ounce mark again. In fact, it is just a few dollars away from revisiting its 2009 highs. Silver has been equally buoyant, it recently touched its highest level in weeks. Thus, with the global economic uncertainty threatening to raise its ugly head again; it would pay to move some of your money into the relative safety of these precious metals.

 Chart of the day
It is often said that the India growth story is driven by its consuming class. Today's chart of the day shows that consumption is indeed the bedrock of the Indian economy, accounting for 57% of its GDP. Compare that with China, where private domestic consumption forms only 37% of its GDP. In fact, India fares well when compared to the major economies in the Asia Pacific region. The reason is not hard to find. Most of these economies are export led and are dependent on the constant demand of goods from the Western nations. In the case of China for example, exports contribute to 37% of the GDP as against 13% in the case of India. Little wonder that India has shown a great deal of resilience to global economic crises time and again.

Source: Business Line, Global Insight, McKinsey

The hide and seek that the monsoons continue to play with the fortunes of rural India and corporates alike has taken a new turn, but this time, thankfully for the better. As per reports, the monsoon rains in India have been near normal for the three consecutive weeks since about the 12th of last month. In fact, the rainfall in the country is said to be almost 4% above normal during this period. Nonetheless, the total seasonal rainfall across India for the full June-September season is still forecast to be 20% below normal despite the recent downpour due to the rains playing truant during the initial part of the season. Interestingly, these rains might just have helped in bringing down the total deficit for this year from 25% to 23%. Also, this last minute comeback is expected to help the case of the depleted reservoirs and affected crops in the country, though its exact impact will be known only later in the year.

Sugar prices have already soared to Rs 35 a kg since last September due to a global shortage. Indications are that they are likely to go up further. And rising sugar prices are not the only problem. Already, the prospect of rising inflation looms large given that deficient rains have wreaked havoc on crop production in the country. Inflation (WPI) for the week ended August 22 moved up to -0.21% from -0.95% recorded in the week before. There are concerns that inflation will once again breach RBI's estimate of 5% by the end of this fiscal. What is more, the CPI, in which food gets a higher weightage, surged to 11.89% in July. The government contends that there are sufficient food stocks which would enable the country to tide over the drought. But, as usual, execution is the key and the government will really have to pull up its socks soon on releasing these buffer stocks and keep inflation in check lest the situation gets out of control.

Subtle aftershocks of the economic meltdown coupled with drought-like settings and inflationary threat do not particularly make the perfect setting for the growth of banking sector. However the 1% YoY growth that the Indian banking sector has managed in its credit disbursals in the first five months of FY10 is certainly disappointing; if not alarming. Although the first quarter is typically a muted one for the banking sector in terms of deposit accumulation and credit offtake, this year the performance has been particularly sloppy, for understandable reasons. Given that historically the credit growth in India has been on an average 2 times the GDP growth, we do not envisage the sector to clock credit growth in excess of 12% - 15% this fiscal.

Source: Livemint

The Planning Commission deputy chairman recently underlined the urgent need for divestment to bridge the resource gap of Rs 1.6 trillion in the Eleventh Five-Year Plan. The gravity of the situation is clear from the fact that the government is not divesting any new company but is instead selling its stake in companies already listed on the stock exchanges through FPOs. The FPO or follow on public offer is when a company listed on the exchange comes up with a secondary sale of shares offer. For the government, the advantage of an FPO is that they don't have to go take approvals from the parliament and the line ministry before making an offer as this results in a large lead time. For example, Coal India is expected to take at least 6 months before it can file the prospectus for an IPO with SEBI. The reason is that it will have to take approval from its board of directors, the administrative ministry, the disinvestment department, the Cabinet and only then can it file its prospectus. Even the government gets entangled in its own red tape.

In the meanwhile, the BSE-Sensex was up around 300 points at the time of writing as it really took off in the post lunch session. While losses persisted in the IT index, other indices managed to trade in the green led by metal, auto and capital goods sectors. On the global front, while key Asian indices closed mixed, European indices are trading firm currently.

 Today's investing mantra
"We'll happily forgo knowing the price history and instead will seek whatever information will further our understanding of the company's business. After we buy a stock, consequently, we would not be disturbed if markets closed for a year or two." - Warren Buffett

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6 Responses to "Are We Nearing The End of Global Recession?"


Sep 5, 2009

A study of the monsoon of the past 100yrs. has shown that while the 'amunt of rain' we gat is same, the period has reduced very much. From the previous 1st week of June to last week of Sept. when we had monsoons, this has now reduced to july to Sept. end/1st fortnight of Oct. The quantam of water is almost same. And therefore more importance to Rain-water harvesting. Else the water instead of perculating down is gushed away.



Sep 4, 2009

Agree gold has started flirting with US$ 1,000 per ounce mark again. What is your opinion on Silver. Agreed Gold is a defensive play. Do you think Silver can also be part of the overall suggested portfolio allocation?


Syed Zafar Ahmad

Sep 4, 2009

"The 5-Minute Wrap Up" is indeed very useful, to the point and informative. As the name suggests, it is precise as well. The efforts are worthwhile. I believe, it will get extremely popular with those who have time constraints, but are eager to know relevant developments in the money market at a glance. My congratulations for the endeavour made on this score.


Sangeeta Upadhyay

Sep 4, 2009

I love the equity wrap-up.It is jargons-free,simple and yet so much informative.One doesn't need to go through bulks of report to know whats happening around.However,it would surely help to have just two-three bullets on global developments(US,China,UK,Japan..) too or may be how the other exchanges around the world fared-with any news shockers/surprises.


venkatesh natarajan

Sep 4, 2009

Congrats to Equity . the 5 minutes wrap ups are truely informative for busy people, short and sweet.

keep up the good work



Sep 4, 2009

In the meanwhile, the BSE-Sensex was up around 300 points at the time of writing as it really took off in the post lunch session.

It shall be either
In the meantime or Meanwhile

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