Expecting a stronger 2010? Don't bet on it...

Dec 29, 2009

In this issue:
» Emerging markets lead the 2009 stockmarket rally
» China becomes the world's second largest economy
» Delays mar Indian power sector again
» India Inc. has ambitious fund raising plans in 2010
» ...and more!!

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If one were to look at the performance of the global stockmarkets in 2009, a casual observer might be fooled into thinking that the global economy is witnessing a rip roaring recovery. But that has obviously not been the case. While 2009 was certainly better than 2008 in that the scenario did not worsen further but showed some signs of improvement, the recovery has been wobbly at best. And the outlook for the global economy in 2010 remains hazy. At least as far as the US economy is concerned, Nobel laureate Paul Krugman is of the opinion that it may suffer another contraction next year. His remarks are based on the grim unemployment scenario in the country. While the stimulus packages have done their bit in propping up the economy, the sustainability of this recovery has become questionable. This is simply because the recovery has not trickled to the job market yet which continues to remain very weak. And Krugman believes that the present recovery which is being driven by fiscal stimulus is going to fade out in the second half of next year.

We believe that that the real test for the US government or for that matter other governments across the world will be accentuated when the stimulus packages are withdrawn. Right now, these stimulus measures seem to have done their job in terms of averting any further crisis. But unless the economic environment and job prospects improve, this recovery stands on shaky terrain. And then, many of the developed countries also have another serious and long term problem to deal with - mounting deficits. The only thing that seems certain is that there is not likely to be any easy solution to these challenges going forward.

 Chart of the day
For all the darkness that was cast in 2008 by arguably the worst financial crisis in the world, 2009 emerged as a much stronger year. While the economic performance of countries was still not much to talk about, what really stood out was the rally in global stockmarkets in 2009. And as today's chart of the day shows the rise in the stockmarkets of the BRIC nations has been nothing short of impressive. With the developed countries still grappling with recession, investors turned the limelight on emerging stockmarkets as they are expected to grow at a much faster rate than their developed peers. However, valuations in these markets have already started to look frothy with stock prices having run ahead of fundamentals.

% Change is in local currency terms
(Data Source: The Economist)

Do you believe economic numbers coming out of China? If yes, the dragon nation has just displaced Japan to become the world's second largest economy. The 2009 GDP numbers for China are likely to be US$ 4.75 trillion. This will be around 3% higher than Japan's GDP.

So, what has helped China outpace Japan in the GDP race? Call it the former's abundant natural resources and low cost manufacturing for all items ranging from toys to airplanes.

China is now eyeing the top spot that is currently occupied by the US. But our calculations show that it will take around 20 years for it to catch up with the latter. This is when Chinese economy continues to grow at 8% per year while the US manages a mere 2% annual GDP growth.

Data: CIA Factbook, Equitymaster's assumptions

And where does India stand in this race? If our economy were to grow by around 7.5% consistently for the next 20 years, we will just reach where China is today! So there's a long-long way to go.

As per reports in a leading business daily, engineering behemoth BHEL is set to miss its capacity addition target yet again. This may have a cascading effect on power generation companies as well. Power projects of companies such as NTPC and other state-run utilities may get delayed by at least three months due to BHEL's tardiness in readying its new capacity. BHEL had earlier set a goal of increasing its manufacturing capacity to 15,000 MW by December 2009 from its current capacity of 10,000 MW. But due to some financial problem, it would need another 3 months to get their increased capacity in place.

With the delayed delivery of power equipment, India's Planning Commission is unhappy with BHEL's performance and has gone as far as to say that BHEL's project management skills are poor. This lack of promptness on the part of the company on such an important issue is not only bad news for the country's power addition targets, but is also affecting the company's own revenues and reputation adversely. Many of the private power firms have already shifted their preference away from BHEL by placing a large quantity of their orders with Chinese firms because of their ability to deliver orders in a shorter duration as compared with BHEL. Indeed, a sad state of affairs in a country plagued by power shortages.

The financial crisis has woken the US government to the excesses of Wall Street. And in its latest effort, the US government proposes to bring back a depression era legislation - the 1933 Glass Steagall Act. Under this legislation, banks which take deposits would be barred from underwriting securities or engaging in proprietary trading. They would also be barred from selling insurance or owning retail brokerages. If this legislation is passed, it would mean splitting up of banks including Citigroup Inc. The question that really arises is that had the Steagall Act not been dismantled, would we have the crisis of the scale we have witnessed now. No doubt, banks such as Citigroup and the like which suffered heavily in the crisis would have been much better off. But whether the overall crisis as such would have been entirely averted remains a debatable point. After all, the now extinct Bear Stearns and Lehman Brothers were pure investment banks.

Nevertheless, we believe that the basic banking functions have to remain conservative and therefore a proposal to split up core banking and investment banking activities seems like a step in the right direction. What is more, if this results in big banks having to be broken into smaller ones it does make sense given that the notion 'Too Big to Fail' no longer holds true.

2010 may not turn out to be such a great year indeed but that has not deterred India Inc. which has lined up Rs 1,500 bn worth of equity sales next year. In 2009, Rs 648 bn was raised by 96 companies through QIPs, IPOs and right issues to existing shareholders. And it appears that QIPs are set to dominate the scene in 2010 as well. As reported in Business Standard, of the 129 companies looking to tap the capital market in 2010, around 67% are looking to raise funds through the QIP route while the balance are going in for IPOs. And the sectors that are largely looking to raise funds are real estate, power, banking, engineering and infrastructure.

Meanwhile, led by buying across index heavyweights, the BSE-Sensex was trading higher by 52 points at the time of writing. While banking and metals stocks were trading firm, IT and healthcare stocks were at the receiving end. While most Asian markets were trading mixed at the time of writing, European markets are also trading mixed.

 Today's investing mantra
"The chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions." - Benjamin Graham

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7 Responses to "Expecting a stronger 2010? Don't bet on it..."

vishwajeet bajaj

Jan 1, 2010

i think e w master is usful to new and yunger i request to e w master more information to comodity like gold silver copper crude. is useful to younger. thanks


Prakash Basrur

Dec 31, 2009

Quite impartial assessment of what is likely to be the finance scenario in the year 2010 ! It is very easy , as done by almost all the "Equity Advisors" , to paint a rosy picture of our financial market all the time ! This is typical of all professions ! Politicians not admitting their collossal failures on national growth in the long span of 60 years , Govt. "baboos" taking shelter under legal anamolies , CA's juggling figures to show profits , engineers not admitting professional negligence in case of flyover mishaps, physicians throwing "latin jargons" to hide their failures , lawyers spinning their legalese clouds to create a smoke-screen and so on an so forth ! In "Mera Bharat Mahan" no profession wants itself to be "audited" by a "third party" under the familiar arguement " others cannot understand our technical issues" ! So much so that it is in our country only where the Supreme Court judges on their own passed a judgement on the matter of "medical negligence" whereby a doctor in India cannot be sued in our courts of law for such negligence under our criminal law but only under a civil law for monetary compensation ! "No Public Audit" is the message sent ! In such an environment your "free & frank" comments are like "CNN/BBC" and NOT like our so called "impartial" electronic and paper media ! Thank you for dshing out "impartial" daily financial/economic news thru Internet ! Hope , as time passes , you too are not cowed down by that "unseen hand" of influence!


Saroj Dhotre

Dec 31, 2009

Namaskar! TBTF was very much interesting.No doubt that these cos. are doing better than before.They have swallowed the public money only .Firstly by right hand viz public & banks etc. Thereafter by left hand viz their govt.TSTS i.e. too small too survive had happened here also with Pathpedhies.Thanks for the hint.Wish U & Ur entire team a very very HAPPY NEW YEAR-2010.



Dec 29, 2009

I am a new person in stock marketing, but after reading the 5 minute wrapup,would be a strong man in 2010.



Dec 29, 2009

It is always easy to comment on a PSU performance.Can you please tell us as to how the Chinese companies fulfilled their contractual obligations within the time schedule with ref.to the contracts awarded to them by the West Begal Govt.


srinivasan Balsubramanian

Dec 29, 2009

Every day we are receiving usefull information around the globe.


rekha mehta

Dec 29, 2009

thanks very informatic as usual wishing the whole group at quantum a very happy 2010

Equitymaster requests your view! Post a comment on "Expecting a stronger 2010? Don't bet on it...". Click here!