»5 Minute Wrap Up by Equitymaster

On This Day - 7 JULY 2009
2009 remains a dangerous year

In this issue:
» Debt of developed nations soar
» Fiscal deficit concerns loom large
» No respite for the US economy till 2010
» Wall Street remains tenacious
» ...and more!!
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For all the talks floating around citing 'green shoots' sprouting across economies, the World Bank does not sound too upbeat. In fact, the President of the World Bank Robert Zoellick has issued a grim warning that nations must not presume that a global economic recovery is near. Zoellick has lauded the central banks and governments across countries for reacting quickly when the crisis deepened to prevent a further deterioration in the state of affairs by stabilizing the financial markets and introducing stimulus packages to bolster consumption.
However, he has said, "Yet 2009 remains a dangerous year. Recent gains could be reversed easily, and the pace of recovery in 2010 is far from certain."

Interestingly, while the developed world is mired in a recession, the developing nations are not expected to do too well either. In fact, excluding India and China, the World Bank estimates that the GDP of developing countries will decline by 1.6% this year. What is more, a decline in the average GDP growth rate in developing countries by 1% can trap as many as 20 m more people in extreme poverty is how the World Bank chose to put it across.

Given that the crisis was truly global with no country really and truly spared from its repercussions, we believe that it is not wise to assume that the recovery will happen at a fast pace. One need not look further than the US to reiterate this fact. The dismal jobs report released in the US already pricked the bubble of recovery that was supposed to have kicked in there. When a sustained economic recovery will actually take place is something that will be open to a raging debate the world over but what is clear is that it will be a slow process.

 Chart of the day
After yesterday's crash, the Sensex P/E stood at around 18.5 times the trailing 12-months earnings of the 30 companies that form part of the index. Not only is this P/E the lowest Budget day level since February 2005, it is based on earnings for a year that was terrible for Indian companies. So, if a case for recovery in corporate India's earnings growth can be made, the current Sensex P/E level does not look that expensive.

Source: Prowess

The economic crisis has meant that the developed nations are now in debt like never before in recent memory. As per the International Monetary Fund (IMF), their debt level will expand to at least 114% of their combined gross domestic product in 2014. Contrast that with the emerging economies, whose debt level will shoot up by only 35% in that time.

As per Bloomberg, this disparity in debt levels will change the balance of economic power in the world. The developed nations will no longer be able to dictate terms to us in the matters of economic policies, currency arrangements and addressing climate change.

We shouldn't be surprised. Over the course of human history, every powerful civilisation has created conditions for its own downfall and eventually perished. While the Western civilisation is unlikely to perish just yet, its investment bankers certainly tried their best!

The Union Budget may not have met the expectations of the stock markets. It may also not have really stood out in terms of having any significant positive impact on any section of the industry. But the real concern is the fiscal deficit as a percentage of GDP.

The deficit zoomed to 6.2% in FY09 as the global economic slowdown impacted India's pace of growth, as a result of which stimulus measures had to be undertaken. Now, the FM has indicated that the deficit will form 6.8% of GDP in FY10, which has begun to created flutters across financial markets.

Source: CMIE

While infrastructure development has been stressed upon in the budget and very rightly so, the fact remains that the government does not have much headroom in terms of raising resources for the same. Further borrowings will only exacerbate an already difficult situation. In light of this, while the government's focus on restoring India's growth to 9% of GDP may be laudable, the million dollar question is - will the fiscal deficit really allow India to grow the way it had done in the past?

This government will need to quickly develop some blueprint which clearly specifies its strategy of bringing this deficit down. While one understands that the deficit may not reduce overnight, a clear direction will go a long way in upholding the credibility of the government.

Many in India may not have known Wilbur Ross beyond his Spice Jet escapades. But the man commands immense respect internationally. In fact, he is believed to be one of the best turnaround financiers in the world and hence, surely knows a thing or two about bankruptcy. Thus, when CNBC picked his brains on the bankruptcy of US, the biggest economy there is, we were all ears.

Ross believes that he does not see the US economy recovering well into 2010 because its consumers are saving money rather than spending it. He further added that the US consumers make up nearly 70% of the economy and hence, if one takes 6% away and saves it, the same translates into a 4% hit to the economy and this, as per Ross, is indeed a lot to overcome. The turnaround man also felt that the US$ 6 trillion destruction in people's net worth was also acting as a big deterrent to spending. Thus, while every dollar put into savings is good in the long-term, it is horrible for the economy in the near-term is how Ross summed it up.

If you thought Wall Street, the place where the seeds of the global financial crisis were sown, is losing its allure, it's time to banish it outright. The New York Times is carrying a piece on how just as cockroaches are capable of surviving a nuclear conflagration, the Wall Street is showing a similar tenacity to the economic 'Pearl Harbor'.

So, Lehman Brothers may have gone down under, some biggies may have been rescued by the US government and financing may have become tight but new players have continued springing up on Wall Street. And this could mean further trouble for the industry as ambitious new rivals resort to moves like lowering fees and bidding up pay scales, thus threatening the profitability of the industry. Not a good sign given the kind of pressure the financial sector is already reeling under.

After the drubbing received yesterday post the disappointment over the Union Budget, the BSE-Sensex witnessed a volatile trading session today before managing to trade well above the dotted line at the time of writing. While gains were seen in the FMCG and auto indices, stocks from the oil and gas space were at the receiving end. On the global front, while key Asian indices closed mixed, European indices are trading in the positive currently.

 Today's investing mantra
"Based on my own personal experience, both as an investor in recent years and an expert witness in years past, rarely do more than three or four variables really count. Everything else is noise." - Marty Whitman

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