Economy will be in shambles throughout 2009
(Mar 2, 2009)
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In this issue:
For investors seeped into the Benjamin Graham style of investing, annual letters by Warren Buffett, his most famous disciple, are awaited with bated breath. In fact, readers would have gotten even more desperate this time around, wanting to know Buffett's view on the current economic turmoil and his own investment strategy during the same. And the letter, which was released this last Saturday did not disappoint on both the fronts.
» Buffett's fears and beliefs
» Ishaat Hussain of Tata Sons speaks up his mind
» Dire predictions from economic experts
» Healthcare gets a government boost
» ...and more!
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On the economic slowdown, even Buffett admitted that it has been the worst he has ever seen but also expressed hope that both the economy as well as stocks will rebound. He opined, "The economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so."
Buffett also made a candid admission of a few of his investment mistakes in the letter. Foremost among them would be his purchase of oil major Conoco Phillips. Buffett's investment, as per his own admission, came at a time when oil and gas prices were at their peak and hence, when prices came down dramatically, share price of Conoco Phillips also fell, leaving Buffett with huge losses. However, he does not believe that oil prices could stay at US$ 40 - US$ 50 for long and feels that chances that they will rise much higher are quite bright.
For oil watchers, Buffett has said, "I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price."
The chief financial officers (CFOs) of companies were never so revered a lot till about a year ago. They now find themselves as the butt of jokes while also facing heavy criticism that revolves around their role in the financial crisis. Ishaat Hussain, the financial director at Tata Sons, also blames the CFOs for bringing about troubles for their companies by misjudging the realities. In an interview with Mint, Mr. Hussain said, "The role of the CFO is to primarily manage the liquidity of his/her organization. That is the primary goal. But CFOs today aspire to do the sexier stuff such as investor relations, talking up the stock price and strategy...I blame CFOs for this financial crisis which the world is going through now. Where were they and what were they doing? Why didn't they manage the liquidity?"
On the lessons from the crisis, Mr. Hussain cited Mr. H.T. Parekh (founder of Housing Development Finance Corp.), who once said, "Remember, you raise money not when you need it, you raise money when it is available."
On the challenges faced by Indian companies that made international acquisitions, he talked about the problem of protectionism that the world is facing currently. Given this, his view was, "If an Indian industry has got used to credit as well as capital from foreign banks, I see that diminishing in the coming days. So, we have to work on the assumption that this window won't be there. And Indian industry has taken a fair amount of foreign currency borrowings. We should start planning, not merely at the company level, but I am quite sure this must be thought of at RBI and finance ministry levels. Corporate debt has to be repaid. Fortunately, we still have an 18-month horizon, so that planning must start. In other words, we have to look much more to domestic sources."
The New York Times (NYT) has collated views of top economic experts as to when do they see the recession getting over. The views outlined by these experts largely hinge in uncertainty. For instance, James Grant, editor of the widely read Grant's Interest Rate Observer writes, "Today's low prices, painful though they may be, are the market's own shovel-ready stimulus. Before you know it, the stock market, and the residential real-estate market, too, will be on their way back up again - just don't ask when."
Another view, this one from the man who predicted and warned against the crisis - Nouriel Roubini, the professor of economics at the New York University Stern School of Business - the recession will take different shapes (V, U, and L) before it gets any better. Roubini is of the belief that, "...things could get worse. We now face a 1 in 3 chance that, if appropriate policies are not put in place, this ugly U-shaped recession may turn into a more virulent L-shaped near-depression or stag-deflation (a deadly combination of economic stagnation and price deflation) like the one Japan experienced in the 1990s after its real estate and equity bubbles burst."
How scary can it get?
"While most of the world grapples with a crippling financial crisis and a recession, optimism reigns in much of India as its economy continues to grow," writes the NYT. It compares India's 5.3% growth during the December 2008 quarter to the recession faced by the US and Japan (where GDP contracted by 6.2% and 12.7% respectively during the same quarter). While the article cites views that boast of India's economic growth and those that deride it, one notable mention is that of Nandan Nilekani, the co-chairman of Infosys Technologies, who says, "It is reasonable to assume that India will be among the first to recover when the recovery starts. Indian business leaders seem to be more optimistic."
Well, we believe that while the economic optimism is justified given that India has largely been able to keep herself away from the vicissitudes of the financial meltdown, the problems that we are facing - slowing economy, rising fiscal deficit, weak currency - are for real and have the potential of undermining the economic dream that we so occasionally see for ourselves.
Then, thanks to our neighbours on all sides - Bangladesh (East), Pakistan (West), Nepal (North), and Sri Lanka (South) - we've sort of become a geo-political hot potato that can eventually lead to a lower status among emerging market economies. The crisis emanating (and transferred to us) in these neighbouring countries is a spot of bother for us as we see international investors remaining jittery of investing in Indian stocks.
Asian markets, with the exception of China, closed deep in the red today, as worries about a deeper slowdown loomed large. While stocks in Hong Kong closed with 3.9% losses, those in Japan ended 3.8% down. Stocks in India also closed weak, as the benchmark BSE-Sensex ended the day almost 280 points down. The rupee slid to a low of 51.74 to the US dollar at the time of writing as foreign investors continued their pull-out from Indian stocks.
Would both 'safe-haven asset' and 'asset bubble' sound alright when referring to the same asset class? Sounds striking but both the terms have been used recently to describe the same asset i.e., gold. As per an Economic Times report, the prices of gold have jumped 50% since October 2008. This is mainly because a flurry of investors with seemingly lower risk appetites has been piling onto gold due to its safe-haven status. But that has caused a surge in the yellow metal's prices, which has got many investors jittery about another bubble forming due to the over optimism concerning gold. However after the bursting of bubbles in equities, real estate and then commodities, such anxiety would only be natural.
Healthcare in India is set to receive a boost with the government planning to invest up to US$ 2 bn (around Rs 100 bn) annually to develop more effective medicines for diseases such as malaria and tuberculosis. Since these diseases are more and more prevalent in the developing nations, global pharma companies are not too enthused in developing drugs in these fields as that would mean lesser revenues and profits.
While these proposals sound promising, it remains to be seen how effectively the same will be executed. This is especially considering that the current government will face elections this year, which will be held between April 16 and June 1.
"Our long-avowed goal is to be the "buyer of choice" for businesses - particularly those built and owned by families. The way to achieve this goal is to deserve it. That means we must keep our promises; avoid leveraging up acquired businesses; grant unusual autonomy to our managers; and hold the purchased companies through thick and thin (though we prefer thick and thicker)." - Warren Buffett (2008 letter to shareholders)
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