|»5 Minute Wrap Up by Equitymaster|
On This Day - 27 MAY 2010
'Stocks could fall by 40%'
In this issue:
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It may be naive to simply extrapolate these events in the future and assume that a similar fate awaits the US stock markets today. But the case for a 35%-40% correction in the current times has been made stronger by one observation. That of the economic reality on the ground. Stock markets have factored in a very quick economic recovery. However, nothing could be further from the truth. Unemployment levels have failed to ease and credit is still hard to come by. Thus, the US stock markets could well start heading downwards once this reality catches up with them. Take into account some sort of overreaction and a 35%-40% correction in US stocks does look well within the realms of possibility.
Needless to say, even Indian stocks could feel the heat. But Indian investors have very little to panic from such an episode. On the contrary, it could turn out to be a fantastic opportunity. An opportunity to buy into the long term India growth story at attractive valuations. Thus, as it turns out, one investor's loss could turn out to be a gain for the other.
He has also warned that global investors must not expect more than 4-6% returns from a 'diversified portfolio of stocks and bonds'. "Investors must respect this rather tortuous journey in the months and years ahead," he has said.
Given his years of experience and the quantum of money that he has successfully managed over these years, you can't expect Gross to go wrong in his predictions. Anyways, we see one direct fall-out of the 'low return' years that Gross predicts for western investors. And that is more money will flow to the high-return' emerging markets like India over the next few years. Of course, investors here need to guard themselves against any bubble that such a huge flow of foreign money can cause!
What gives? Apparently, the rise in BDI has been attributed majorly to the jump in rates of one particular type of ship. And these ships are nothing but capesize vessels. It should be noted that capesize vessels are amongst the largest in the world. And they are supposed to be the vessels of choice for transporting metal ores and can also be used as oil tankers.
Thus, looks like there is more metal and oil floating in the seas globally. And if this is indeed the case then are either the buyers hungry for products or sellers are getting desperate to unload. Looking at the economic scenario globally, appears more to be a case of the latter than former. However, we cannot be 100% sure. We may have to wait for some time before the real story is out.
In the current financial year, developers need to pay around Rs 250 bn towards debt repayment. Thus they have two choices right now - wait and watch for the conditions to improve or take a valuation hit. We believe that the latter option is more feasible in the current market conditions as it would be a win-win situation for both of them.
The OECD also believes that the RBI is not taking sufficient action to check liquidity crunch. Particularly ahead of the government's ambitious borrowing programme. We believe that the concerns of inflation level remaining high are justified. However, adopting a calibrated approach to contain price rise is the only way to do so, without hurting growth.
As usual, he came down heavily on the US administration and commented that the lifetime achievement of Greenspan and Bernanke is really that they created a bubble in everything...everywhere. According to him, during the crisis of 2008, the financial system went bust but did not die. However, the next time it happens, the nations will go bust and ultimately, the world will go to war. Honestly, we couldn't have ended on a more bitter note.
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