Is the worst over? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is the worst over? 

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In this issue:
» Is the stockmarkets' rise for real?
» Zero tolerance for slackers in IT companies
» Microsoft reports first ever quarterly loss
» Worst American CEOs
» ...and more!

Source: The Economist
The finance ministers of the G20 nations are meeting in Washington over the weekend. In an interesting article, The Economist sounds a warning bell for them. It reports that 66% of the 42 stock markets that the magazine tracks have risen in the past 6 weeks by more than 20%. But the worst is not over and any complacency might be dangerous. For one, all stock market rallies have not presaged economic recovery. Much of the current positive signs are due to governments pumping in massive doses of liquidity. However, a genuine recovery involves sustainable sources of private spending, higher employment, lower household debt, and better savings rate. It will sometime before these indicators improve. Hence, it is important that governments do not slacken. They need to take further decisive action and also device innovative exit options in the medium term.

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Timothy Geithner, the man who will host the finance ministers of the G20 nations in Washington seems to think the worst is over. In an opinion piece for the Financial Times, Geithner has expressed hope that the decline in world trade is easing and conditions in some financial markets improving. He however cautioned that significant challenges and risks still remain and hence, countries must stand united so that global recovery could be further strengthened. Indeed. And no one has a bigger stake in it than the US economy itself.

The economic downturn has brought to the fore some stark realities, at least on the jobs front. 'Cost cutting' and 'downsizing' have become the new buzzwords. In the heady days when the economy was growing at a scorching pace of 9% plus, enforcing strict performance standards was not considered seriously, as a result of which there were ample leg room for everyone around. But the eruption of the crisis has caused companies to take a long and hard look at employee performance and compel underperformers to either pull up their socks or leave. This phenomenon has increasingly become pronounced in the Indian IT sector. For instance, Infosys officially announced putting around 2,100 non-performers under the scanner after the end of its annual performance cycle. Similarly, TCS gave a warning to around 1,100 employees, while Wipro put around 7% of its employees in the list of non-performers as against 2-3% in the previous year. As per the Business Standard, close to 200,000 IT employees are estimated to have quit by the end of FY09 and in this regard FY10 is expected to be one of the toughest years for the IT industry. Charles Darwin's theory - survival of the fittest - clearly rings true here.

Software behemoth Microsoft witnessed its quarterly sales fall yesterday for the first time in its 23 year old history as a public company. Its sales fell 6% YoY while earnings saw a sharp 32% YoY fall for the quarter ended March 2009. The company has been hit hard due to the slump in demand for its Windows operating system as the economic slowdown continues to drag PC sales downward. Microsoft's CFO Chris Liddell has been quoted by CNN Money as saying that the current recession has been 'the most difficult economic environment we've faced in our history'. In January this year Microsoft announced its first mass job cut in its 34 year history in a desperate attempt to bolster its bottom line with an expected 5,000 job cuts by mid 2010. After the abysmal performance of Windows Vista, the company is now banking on its new 'Windows 7' operating system to break out of its slump and give a fillip to sales.

In what might sound music to the ears of borrowers, interest rates in India are expected to come down in the future, though at a very gradual pace. At least this is what the deputy governor of the Reserve Bank of India (RBI), Dr. Rakesh Mohan believes. As elucidated by him, the reason banks will be slow in lowering the rates is because they are still saddled with high cost deposits. And to put it simply, when a bank is paying its depositors an interest rate of say 8%, it cannot lend to borrowers at or less than 8%. Or that will mean unprofitable business.

This is the reason why although the RBI has cut its short-term lending rate (called the repo rate) by 4.25% in six moves since October 2008, the prime lending rates of major commercial banks have fallen less than 2% during the same period. So, in short, borrowers looking for bargains from banks need to wait a little longer than expected. And those who plan to borrow for purchasing property should hope that builders slash prices further till the time borrowing costs come down to desirable levels!

A US-based publication Conde Nast Portfolio has compiled a list of the 20 best and worst American CEOs of all time based on the inputs of business school professors. Henry Ford is rated as the best ever, followed by JP Morgan. Bill Gates, Warren Buffett and Steve Jobs are placed at the 7th, 10th and 16th positions. The list of worst ever American CEOs is headed by Dick Fuld of Lehman Brothers, followed by Angelo Mozilo of Countrywide Financial, Enron's Ken Lay and Bear Stearns' Jimmy Cayne. Vikram Pandit of Citi also makes it to the dubious list.

It is interesting to note that the financial industry has contributed to bulk of the 'worst CEOs' list. They also belong to the recent times. Financial titans like JP Morgan and Warren Buffett belong to an earlier vintage. It makes us wonder if it is just a reflection of the ongoing financial meltdown or is there a structural problem in the industry because of which the biggest names in the biggest firms earn such a bad name?

They may have been hit by severe crisis of poor liquidity and high delinquency levels in their domestic markets. But that does not seem to be deterring foreign banks from succumbing to the lure of offering their services in developing economies like India. Although the RBI has applied brakes to the roadmap suggested for allowing greater leeway to foreign banks for expanding their business in the country, these entities are nevertheless evaluating alternative means. Besides plain vanilla banking, these entities are also considering setting up of NBFCs and asset management companies and offering services related to capital markets. The global financial crisis has made the RBI more circumspect about allowing greater market access to foreign banks. However, India's relative lower credit penetration, better credit history and high fee income generating potential has lined up the foreign entities at the central bank's doors for various licenses. The foreign bank with the largest franchise in India, Standard Chartered, is in fact also contemplating listing though the India Depository Receipt (IDR) route to raise capital to the tune of US$ 1 bn for its expansion plans.

In an interview with Mint, Ronnie Screwvala of UTV Software says the economic downturn has made the Indian media industry a saner place to work in. During the boom, too much equity had flowed in to the sector and the business model of the new entrants was not sustainable. While a correction was always on the cards, Mr. Screwvala was expecting it to take 2 to 3 years and not as quickly as 6 months. He also believes that things need to correct further in the media sector because companies are only cutting costs as of now and not correcting the inherent business models. To that extent, they're still living in denial.

The Indian stockmarkets ended the day on a firm note today as buying activity intensified during the second half. The BSE-30 Index ended with gains of nearly 200 points. Stocks across sectors ended the day on a firm note led by banking and capital goods space. As for global indices, Asian markets closed on a mixed note with Hong Kong ending higher by 0.3 %, while China and Japan closed lower by 0.6% and 1.6% respectively. Stocks in Europe are currently trading firm.

04:47  Today's investing mantra
"If I find something that is attractive today, I am going to buy it today. I am not going to wait and hope that it sells cheaper 6 months from now. Because who knows when stocks will hit a low or a high? Nobody knows that. All you know is whether you're getting enough for your money or not." - Warren Buffett
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2 Responses to "Is the worst over?"

virk kuldip singh

Apr 24, 2009

thanks for putting in lot of efforts to gather all the data/ information to put up today's report "is the worst over?". thanks again. b r
virk kuldi


jehangir unvala

Apr 24, 2009

A very interesting & correct analysis.

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