Recession could well be over - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Recession could well be over 

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In this issue:
» Wadias and Danone part ways
» IT sector is being plagued by 'ills'
» RBI chooses not to toe the West
» How to handle failing companies
» ...and more!

It looks like recession will be over before we know it. Take a look at the chart below, which perhaps helps unfold the most potent reason behind the world economy's huge contraction in the fourth quarter of 2008.

Image Source: Business Week

US consumer, the biggest driver of the world GDP chose to cut back massively and instead, opted to save some of his hard earned income. Well, the trend has continued to this day, manifesting itself in the huge reduction in household debt as indicated by the chart above. As per Business Week, savings as a percentage of US household income during the first two months of 2009 is already ruling at 10-year highs and businesses, adjusting to this new shift of lower spending and higher saving have embarked on a major cost cutting drive. The end result? Even a small pickup in demand will help companies post robust bottomline numbers and help bring back confidence in the battered economy. Furthermore, while everyone knew that deleveraging i.e. reduction of debt would be the key to a healthy recovery, we don't think anyone had a clue that the same will happen at such a lightning speed. At this rate, it won't take long for the recession to be a thing of the past.

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Central bank governors in the Western countries have devised a quick and easy way to euphemize the problem of fiscal deficit - print currency notes. However, thankfully our very own RBI has chosen to not toe the line but have a mind of its own. In response to the request put forth by CII (a representative body of India Inc.) that India should monetise its burgeoning fiscal deficit to aid private investment and boost the slowing economy, the RBI has argued that the same must be back by 'real resources'. These resources could be generated only by levying additional taxes. Else we will once again have to stare at steep inflation levels. Hence, the central bank has reiterated that its policies will not be guided by short term goals but by keeping in mind long term implications. Way to go!

While global corporate and banking majors are currently cutting down their IT budgets in a bid to control costs, they may not continue doing so beyond 12 months. IT research and consulting firm IDC India has projected that the lingering slowdown in IT spending will perk up towards the end of the 1HFY10. The IDC view comes with regard to the bigger macro-economic scenario and the holdup in terms of spending on IT infrastructure by most companies. The consulting firm substantiated its view based on the evaluation that since companies are spending only about 20% of the total planned IT budget on new purchases, the rest will be saved up for management of their present set-ups. Hence, it is unlikely that the expenditure will be curtailed for long.

After close to nil imports of gold in the last two months in India, it is now expected that gold imports will see a revival during the month of April. As per a WSJ report, this is set to happen as and when banks finish offloading their unsold stocks of the yellow metal. This is because banks were stuck with unsold gold stocks after prices touched a record high of Rs 15,800 per 10 gm at the end of February, a level at which they continued to remain until last week.

Prices have already gone down; 4th April saw spot gold prices fall sharply to Rs 14,650 per 10 gm from Rs 15,185 rupees per 10 gm last Monday. The rupee dollar rate also has an influencing effect on gold prices. The rupee has already appreciated to 50 from 52 levels, and any further appreciation would make it that much more cheaper for Indians to buy the dollar denominated yellow metal. Currency fluctuations become all the more important as India imports most of its annual requirement of 700 to 800 tons of gold.

After a 2 year long battle, Wadia group and Groupe Danone SA of France (both are indirect promoters of Britannia with 25.5% stake each) have decided to part ways. This will effectively increase the Wadias' holding in the company to 51%. Both the parties had differences over issues relating to the intellectual property rights of the 'Tiger' brand, Danone's minority stake purchase in the nutraceuticals firm Avesthagen and its solo business plans in India. As part of the deal, Wadias' will purchase Danone's stake through Mauritius based Leila Lands, a Wadia group company for a deal size in the range of US$ 180 to US 200 m. While, there will be no impact on Britannia's financials, the decision reduces the uncertainty on the management issues as the management will now be able to focus more on spurring the growth prospects of the company in the future.

In his letter to shareholders, which also seems like a worthwhile summary on how and why the financial crisis happened, JPMorgan Chase's chief Jamie Dimon has asked regulators to create a uniform way of handling failing companies to avoid 'great confusion' in the markets.

He writes, "The first goal should be to regulate financial institutions so they don't fail. If they do fail, a proper resolution process would ensure that action is swift, appropriate and consistent. The lack of consistency alone caused great confusion in the marketplace."

Finally, he has some advice to offer to companies that are facing the heat of the crisis - "The real measure of strength for a country - or a company - is not whether we have problems but how we learn from them, overcome them and emerge better for it."

For banking companies in particular, Dimon's mantra for survival is something that has saved his firm the blushes as well. Chief amongst them are:

  • Staying away from complex derivative products;
  • Cutting back on bad-quality loans, however attractive those are in good times;
  • Not unduly leveraging equity capital, neither relying on low-quality forms of capital;
  • Maintaining a high level of liquidity - and remaining always prepared for unexpected withdrawals; and
  • Avoiding short-term funding of illiquid assets

Hope Indian banks that have otherwise survived the crisis to a large extent but remain prone to busts in the future are listening to the man who's now revered amongst the more respectable chieftains in corporate America.

A lot has been said on the ills of the financial crisis plaguing the economies and business corporates around the world. But employees, who have been witnessing erosion in wealth due to salary cuts, job cuts, lower return on investments and plunging stockmarkets, are now seeing erosion in their health too. As reported in a leading business daily, the worst hit are the financial and IT sectors with the pressure on saving jobs leading to many diseases. Today being World Health Day, as per a study conducted by Assocham and published in the Economic Times, 54% of the workforce in the IT sector was found to be afflicted with diseases such as depression, severe headache, obesity, spondylitis and hypertension. For the financial services sector, 47% of the workforce is suffering from fatigue, diabetes and cardiovascular diseases. Clearly, one man's pain is another man's gain and in this case while IT and financial services are receiving the short end of the stick, pharma companies especially those manufacturing drugs for lifestyle diseases stand to gain from this trend. But on an overall basis, while India continues to boast of having a strong demographic dividend, not much can be done if the country stands on weak legs.

While the global economic slowdown is taking its toll on companies across the globe, Indian pharma companies focusing on custom manufacturing for global innovators actually stand to gain. For instance, Piramal Healthcare in its conference call recently stressed on the fact that it is not seeing any renegotiations from customers on existing contracts. Further, big pharma companies are serious about pruning costs as a result of which players like Piramal Healthcare and other Indian custom manufacturing companies are witnessing an increasing trend in outsourcing towards Asia, particularly India. While small biotech players are facing issues in terms of timelines for completing clinical trials and getting funds for some of their projects, no such problems are plaguing Big Pharma, who continue to remain cash rich. Hence, as long as Indian pharma companies stick to provide custom manufacturing services to major global innovators, the revenue potential from these contracts will continue to remain strong.

The man who correctly predicted the recent stock market upswing now advises caution. Marc Faber had recently recommended buying US stocks and they witnessed their steepest rally in over 70 years. As per Bloomberg, he now believes that the indices will decline by about 10% and rebound after July. Interestingly, he also believes that Asian stocks are among the best bets globally as they are cheap and will also benefit the most from a global economic rebound. Mr. Faber seems to have an enviable record when it comes to predicting tops and bottoms. He advised US investors to exit a week before the 1987 crash and in August 2007, before the last bull run ran out of steam.

George Soros, however, holds a pessimistic view. As per Bloomberg, the billionaire investor believes that this is not the beginning of a bull market because the economy is still contracting.

The Indian markets remained closed today on account of Mahavir Jayanti. As far as the global markets are concerned, while the Asian indices closed mixed, European indices are trading in the red currently. As reported on Bloomberg, crude oil prices fell by 1% to US$ 50.4 a barrel, due to US inventories rising from a 15-year high as the recession held down fuel demand.

04:56  Today's investing mantra
"Even the intelligent investor is likely to need considerable willpower to keep from following the crowd." - Benjamin Graham
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