»5 Minute Wrap Up by Equitymaster

On This Day - 6 SEPTEMBER 2011
Are we to see a repeat of the 2008 global crisis?

In this issue:
» Office space has gotten expensive
» Gold to do well in 2012 too
» Will QE3 enthuse investors?
» TRAI to come out with new M&A rules for telecom
» ...and more!

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What is the difference between the economic environment at the time of the Lehman collapse three years ago and the scenario now? Sadly, not much, we would say. Since the crisis, US and European governments have left no stone unturned in pumping money into their respective economies. The hope being that it will speed up recovery. None of which seems to have worked. The US and Europe are still battling recession, unemployment is high, asset prices have failed to recover and the debt has ballooned beyond proportions. So it comes as no surprise, when Deutsche Bank CEO Josef Ackermann states that market conditions now remind him of late 2008 when the crisis had heightened.

The problem is that banks in developed countries are not yet completely out of trouble. This means that if the crisis deepens many of the countries would not be able to rescue them because of their own deficit problems. What is also hindering matters is a political deadlock. This was amply evident in the US over the issue of raising US' debt ceiling. And is being seen in Europe as well, as members such as Germany are not too enthused about bailing its lesser fortunate peers while many others favour it.

Little wonder then that stock markets across the world have been jittery. It is very obvious that any recovery for the US and European economies will be painful and will take a long time. With the kind of debt that these countries have piled on to their books, a faster recovery looks highly difficult. The governments have their hands tied and higher debt means that they have no room to spend on developmental activities and spur the economies. Pumping pointless money into the system with the hope that citizens will begin consuming again is a futile philosophy to depend on. Emerging market economies, which staged a remarkable recovery post the crisis have also once again begun to feel the heat due to high inflation and tepid demand overseas. Although they are overall still in a better shape as compared to the West. Indeed, it has been three years since the crisis, and the outlook for the global economy does not look any better.

Do you think we will see a repeat of the 2008 global crisis? Share with us or post your comments on our Facebook page.

 Chart of the day
Crisis or no crisis, many cities have not seen much of a drop as far as office rentals are concerned. Today's chart of the day shows that Hong Kong has become the most expensive city to rent office space with rentals rising by as much as 32%. Even European cities such as London and Paris continue to remain expensive on the office rentals front despite a deteriorating economic environment. Mumbai, too, figures in the top 10 and is most expensive city in India.

Data Source: The Economist

This asset has gone up each year for the last ten years in a row and looks well placed indeed to add to its illustrious track record. We are indeed referring to the yellow metal gold. Such has been the metal's performance this year that it seems virtually a given that it will close the current calendar year too with a bang. Infact, if a recent report by Barclays is to be believed, even the year 2012 looks unlikely to dim the shine of the lustrous metal. The financial services firm believes that the average price of gold can easily hover around the US$ 2,000 per ounce mark in the next year. Clearly, with the problems in the world far from over, it would take a wise man to bet against this prediction. It should be noted however that the ride may not be smooth. There could be periods where the metal could witness a sharp reversal. But with the long term fundamentals still intact, such opportunities should be viewed as an opportunity rather than setback. Having said that, the temptation to make gold too large a part of one's portfolio should also be avoided we believe.

That the Fed's money printing machines cannot make life easier for the US economy is finally sinking in. So much so that Bernanke's resolve to keep interest rates near zero brought a very temporary cheer to the markets. Now the prospect of a QE3 coming around soon is not enthusing investors either. A poor jobs report makes the possibility of QE3 not just more certain but also more hurried. However, investors no longer wish to buy the argument that cheap money can resolve the US' debt problems. Further the failure of the first two rounds of quantitative easing has also convinced investors of the futility of the same. Now probably some much needed fiscal reforms could help the US tide over its debt issues. Only then will investors want to bet on the long term prospects of the US economy. Meanwhile, the Fed will have a hard time trying to sell the merits of QE3 to economists and investors.

The Indian telecom sector has seen stiff competition in recent times. This competition was intensified when 7 new companies received the license to operate mobile services in 2008. The result was the rock bottom prices that we as customers enjoy today. But from the companies' perspective, these low tariffs combined with rising costs have led margins to get squeezed. While the older and bigger companies have just had to suffer margin losses, the new companies face tougher times as they continue to bleed. As a result, a big question that would come into anyone's mind is why don't these companies just merge into the bigger ones and consolidate?

The reason for this is the ridiculous norms for mergers and acquisitions (M&A) that currently prevail in the sector. The restrictions on the bandwidth and number of subscribers make it unattractive for any one company to even think about acquiring another. Therefore, the welcome news for them is that the telecom regulator of India (TRAI) has stated that the new M&A rules would be out by December 2011. Funnily this is the nth time that the regulator and/or telecom minister has promised this to the sector. But the rules still remain elusive. Whether or not it will actually get formulated is a big question. And if the rules do come out, a bigger question is whether the rules would be attractive enough for companies to go ahead with consolidation. Considering the government's past record in telecom policies, this probability unfortunately appears to be very low.

The dragon nation may soon start breathing out smoke instead of fire. A weakening global environment is set to put the brakes on China's aggressive growth pace. With the European sovereign crisis and a slowdown in the US, demand for Chinese exports is expected to slacken. According to a Reuter's analyst poll, expectations are that China's growth will slow to 8.8% in 2012. This is down from a growth of 9.3% in 2011. These expectations are in line with official forecasts.

However, a slowdown in growth does not worry the China Premier Wen Jiabao. As per China's five year plan ending 2015, the economy is expected to grow at an average of 7% over the period. Rather than slowing growth, China, like India is more concerned with rising inflation. Hot money into emerging markets has helped drive asset prices much beyond reasonable levels. This issue needs to be addressed before it is too late.

Indian stock markets bounced back from day's lows but were still trading weak. At the time of writing, the benchmark BSE Sensex was down by 54 points (0.3%). All sectoral indices were trading in the red except Auto, Oil& Gas and IT stocks. Barring Indonesia, all Asian stock markets were witnessing selling pressure.

 Today's investing mantra
"If you are honest, hardworking, reasonably intelligent and have good common sense, you can do well in the investment field as long as you are not too greedy and don't get too emotional when things go against you." - Walter Schloss

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