Stock markets getting ahead of themselves? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Stock markets getting ahead of themselves? 

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In this issue:
» Economists say immediate recovery unlikely
» Do crude prices point at a revival?
» Shipping cargoes indicate otherwise
» Indian urban centers crumbling
» ...and more!

For those who've started believing that the stock market rally seen over the past two months will sustain in the near future as well, here comes a warning. "It looks to me now as if the markets are now pricing in a rapid recovery, that they're pricing in a V-shaped recession, which I consider extremely unlikely," says Paul Krugman, the 2008 Economics Nobel laureate. Krugman, in fact, joins the likes of Nassim Nicholas Taleb and Nouriel Roubini, who are also calling for a more cautious outlook on growth..

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In fact, in a recent post in The New York Times, Krugman has written, "Given the possibility of bigger losses in the future, the (US) government's evident unwillingness either to own banks or let them fail creates a heads-they-win-tails-we-lose situation. If all goes well, the bankers will win big. If the current strategy fails, taxpayers will be forced to pay for another bailout."

If the data released on home prices in the US in the first quarter of 2009 are anything to go by, a recovery seems to be a long way off. Home prices during the quarter continued to slide mainly led by banks selling foreclosed properties. As per Bloomberg, the median price fell 14% to US$ 169,000 and prices fell in 134 of the 152 metropolitan areas. Distressed sales also played a large part in pulling down prices with such homes being sold for 20% less than the others. Given that prices have been crashing ever since the credit crisis unfolded, affordability has obviously improved. However, mounting job losses and foreclosures has meant that the slide in home prices has not been arrested. The silver lining in the cloud, however, is that the quantum of decline has reduced in each of the three months. While the median home prices fell 12% in March, it was lower than the 18% and 14% decline recorded in January and February respectively. While this shows that there could be a small revival on the anvil, it will still be a while before any substantial recovery in the housing market takes place.


Source: EIA

Crude oil prices have shot up by more than 70% from their lows achieved earlier this year. The question remains whether this is due to an economic recovery, which gets reflected in increased demand for oil, or are investors getting ahead of themselves?

There are a few positive indicators. As per CNNMoney, China's oil imports have increased almost 14% in April this year on a YoY basis. If the Chinese economy improves and US shows some signs of a revival, the upward trend in crude prices is likely to continue. Moreover, the relationship between the price of an ounce of gold and a barrel of crude, which historically has been around 15:1, had been distorted. Now, gold has stabilised while crude has bounced back to bring about an equilibrium.

On the flip side, some observers believe that investors are parking their money in oil in anticipation of the inflation likely from the huge injection of liquidity in the form of the stimulus packages. In that case, the hike in crude prices could run ahead of the levels justified by the demand and supply for the actual commodity. If that happens, prices would eventually overshoot and hurt the possibilities of an economic recovery.

Given the dependence of modern economies on energy, we believe that the crude oil prices will be determined by the viability of alternate sources of energy. Alternative sources will have to be successfully commercialised from limited experiments to convenient mass market usage. Otherwise, the long term trend of crude price will be in one direction - up.

The coast of Singapore perhaps has the answer to the question of whether the current rally in global equities is sustainable or not. And from the looks of it, the rally may not be really sustainable after all. As per an article in The New York Times, at last count, around 735 ships were found idling along the coast of Singapore, one of the world's most prolific and busiest ports. The tonnage on offer, as per some shipping industry veterans, is the highest that they have seen since the early 1980s. It is a sign of the lows the global trade has found itself into. So shell shocked the customers from developed regions like the US and Europe are that shipments of anything that is even remotely non-discretionary has gone for a toss. And it is the shipping industry that is bearing the maximum brunt of it. Already, eight small companies have gone bankrupt and at least one big company could succumb this year. Although shipping rates have improved in recent months, a sign of increased demand, they are still ruling below the cost of providing the service. Hence, until the rates recover substantially, which is likely to happen in Asia first then elsewhere and which also explains the highest number of ships anchored at Singapore, the real rally in equities may have to wait.

Image source: The New York Times

As far as India is concerned, the worst, as far as trade within the country's own borders is concerned, could be over. This is because sales of light commercial vehicles have gone up by an impressive 28% YoY during the month of April. Although sales of medium and heavy commercial vehicles have fallen a steep 42% YoY, data on production and truck rentals seem to be pointing towards a revival in this segment in the second half. With it could also revive the fortunes of the manufacturing industry.

In recent days, we have been able to extract ourselves from work to spend some time with friends and family. The conversations have revolved around elections, mostly (shouldn't they?!). It appears that people are getting ready for the 'buying opportunity' that may present itself post the announcement of the election results. Talk about trying to time the market!

That aside, what would investors buy if indeed there was a so-called buying opportunity?! The best approach may be to invest in good quality stocks available at attractive valuations sooner or later, such investments tend to deliver.

The mutual fund industry, which saw the fastest reaction to the credit crisis due to massive redemptions at the time, is slowly showing signs of getting back on its feet. The industry regained the Rs 5,000 bn level in assets in April 2009 after a gap of two months. The total assets under management (AUM) grew by about 12% in April, which could be due a combination of a rise in the equity markets and investments by banks. Some equity schemes are estimated to have had significant inflows during the month. Seems like most market participants will never let go of their old habit - buying more as stock prices increase, and lesser when they are cheap.

While 70% of the nation still resides in rural India, the urban centers are crumbling from overpopulation. As reported in the Wall Street Journal, 2 decades ago, India had 23 cities with a population of more than 1 m. Today, there are at least 41 such cities. 6 more are likely to soon join the list. In fact, as per the United Nations, India is expected to add 10 m people every year between 2000 and 2030 to its 5,161 cities. Given the dismal pace of infrastructure creation, cities are unable to handle this massive influx of migrant population.

Megacities are not unique to India. But the situation is certainly more dire. Of the 100 fastest growing urban centers in the world, India has 25. China, in contrast, has 8 such cities. China is certainly a comparable nation in terms of population, but does a much better job of managing its infrastructure. It takes 10 years to get projects done even in a high priority city like Mumbai. Unless we get our act together and learn to execute our plans, infrastructure bottlenecks in India will keep dragging down its economic growth and ultimately, the quality of life of the average Indian.

The Indian markets experienced significant volatility before closing lower by 1.2% today. While Asia closed a mixed bag, the European indices are also trading mixed currently. As reported on Bloomberg, the US Dollar fell to a 7 week low against the Euro as investor demand for the currency as a refuge from financial turmoil waned.

04:50  Today's investing mantra
"The best protection against inflation is your own earning power. If you are the best teacher, you will command earning power and get your share of the national economic pie, regardless of the value of the currency. The second best investment is in a good company." - Warren Buffett
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1 Responses to "Stock markets getting ahead of themselves?"

Rao Srinagesh Ramarao

May 13, 2009

In your daily "5 minutes" pls also add comments on bond/money, gold/silver, real estate markets to get a sense of what is happening. brthank y

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