A 100% chance for a global recession

Jun 2, 2012

In this issue:
» Once again, Bihar is the fastest growing state
» Investments in the country are slowing
» Dismal car sales seen in May
» Can a tracking system help speed up projects?
» ...and more!

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The focus of the global economy currently seems to be on Greece. If the country exits the European Union it may cause a tsunami of destruction across the global economy. However, there are much bigger threats on the horizon which investors seem to be ignoring. Swiss money manager and author of popular Gloom Boom & Doom newsletter Marc Faber believes that the global economy has a 100% change of falling into a recession. And Greece and Europe may not even be the tipping point. He believes that a meaningful slowdown in the emerging powerhouses India and China is a much bigger threat. Factory output in China has been weakening; after all global demand for Europe and America has slowed. The HSBC Purchasing Managers Index (PMI) for China fell to 48.7 in May from 49.3 in April. This has been the seventh consecutive month that the index has come in below 50. A level below the 50 mark indicates a contracting economy.

In India the story doesn't get any better. While India's PMI still stands steady at 54.8, growth in the country has contracted significantly. Growth in the country has sunk to a nine year low, with 4QFY12 GDP growth of only 5.3%. Full-year growth for India in FY12 dropped to 6.5%, down from a healthy 8.4% in the previous year.

Last time around, the Indian elephant and the Chinese dragon helped alleviate the global financial crisis. However, this time the elephant is weary and the dragon seems to have lost its fire. Plus other developed nations don't seem to have the necessary ammunition to come out of this new crisis. The issuance of Euro-bonds may help ease the debt burdens in countries like Greece and Spain. However stronger countries like Germany are opposed to the idea as they will have to take on an additional debt burden and deal with higher interest rates. Either way, with so much trouble on the horizon, Faber believes that the global recession could hit either towards the end of this year or early 2013. Being optimistic right now seems difficult and investing in equities foolhardy. But with even blue-chip valuations correcting sharply it may just be the right time to find a good bargain.

With a global recession on the horizon where would you park your surplus funds? Let us know your views or you can also comment on our Facebook page / Google+ page.

 Chart of the day
The prolonged Euro debt crisis has had a debilitating effect over the entire region. Today's chart of the day shows that the Eurozone unemployment has reached its highest ever level since the since the creation of the common currency 13 years ago. Unemployment levels in the 17 member union reached 11% in April, as employers slashed 110,000 jobs. As of now 17.4 m people are without jobs in the eurozone. This is far higher than the 12.7 m who are unemployed in the United States. In the troubled countries of Spain and Greece, these levels are over 20% of the population. Without strong job creation it will be a while before the region comes out of this crisis.

Data source: CNN Money, Economic Times

Everyone is disappointed! Policy makers, economists, investors as well as regulators. They have all reacted sharply to the fall in India's GDP growth. However, its side effects more worrisome. Both India's savings and investment rates have dropped. India's high savings and investment rates have been envied by many. After all, these were responsible for the above average GDP growth. However, the drop in capex plans almost seals the possibility of GDP growth picking up anytime soon. Investment to GDP ratio below 30% is at a seven year low. Our policymakers are however an optimistic lot! They believe that the reform inertia in India has bottomed out. They claim easing out of policy issues relating to mining, manufacturing sooner than expected. However, such promising words no longer convince entrepreneurs and investors. Their doubts will linger until there are some tangible changes in India's investment landscape. The government meanwhile is busy firefighting inflation and deficits. No doubt, reforms will therefore remain in the backburner. We are not taking the FM's optimism about a turnaround in India's GDP prospects on face value. We suggest that investors too keep their medium term expectations about stock returns tempered.

Going by the latest released automobile sales numbers for the month of May 2012, one could expect the managements of the original equipment manufacturers to be worried. The overall negative environment - high petrol prices, high interest rates, higher input costs and duties on vehicles - has impacted sentiments of the customers, leading to slower volume growth. A leading business daily has reported that passenger vehicles increased by 8.9% YoY during the month of May 2012. Prima facie, this figure does not seem that bad. However, if one looks at the sales numbers of some of the larger companies (Maruti Suzuki, Hyundai Motor, Tata Motors in particular), one can see that the overall volume growth has been very slow (low single digits), or even de-growth of 4.3% in the case of Maruti. The 29% YoY decline in volumes of its mini-car (WagonR, Alto and M800; all petrol variants) segment of the company seems to very well reflect the overall market sentiments.

With the economic scenario so grim, there is little wonder that the Prime Minister has galvanized himself into action. As per reports, Dr Singh has decided to set up an investment tracking system in order to ensure speedy implementation of projects. Under the system, councils will be set up that will track projects with ticket size of more than Rs 10 bn and also submit quarterly statements on the same. These statements will then be analyzed for the identification and the subsequent resolution of issues. The idea is no doubt a noble one. But whether it will serve the desired purpose remains to be seen.

Finally some good news! Good governance continued to favourably impact the cow belt state of Bihar. With a growth of 13.1%, the state bagged the title of the fastest growing state in the country for the second year in a row in 2011-12. Improved law and order along with pick-up in infrastructure development has precipitated a favourable investment climate in the state. Even in rural Bihar, higher agricultural productivity and government-funded programs for social uplift are adding to its economic growth. Therefore after growing in double-digits in the past four years, Bihar is a now a bigger economy than Punjab. What comes as a surprise is that Punjab till recently was seeing a huge influx of migrant worker population from Bihar.

It may be noted that Bihar is reaping the benefits of high growth on a low base. At the same time large and industrialized states of Gujarat and Tamil Nadu are showing no let-up in the growth momentum. Both the states grew at a robust 9%, much higher than the country's GDP growth of 6.5% in 2011-12.

The week was marked negative sentiments in the global market on account of the fear of spread of Eurozone crisis from Greece to bigger European economies. Barring China, all stock markets ended on a negative note. Apart from Eurozone concerns, the negative data regarding US jobs and manufacturing added to the negative sentiments. Going forward, we expect Eurozone concerns to continue to haunt the market until Greece holds elections on June 17.

In India, the week witnessed a slew of negative news as rupee touched new lows and the GDP numbers for quarter ending March turned out to be well below expectations. The Indian equity markets finally closed the week 1.6% lower.

Amongst, the other world markets, Asian stock markets were down on account of Euro zone concerns. Barring China (up 1.7%), all Asian markets closed on a negative note with Russia and Germany being the top losers.

Source: Yahoo Finance

 Weekend investing mantra
"The really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions." - Warren Buffett

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    6 Responses to "A 100% chance for a global recession"


    Jun 4, 2012

    Systematic, selective, dividend paying stocks will be the best Bet in this turbulent times.



    Jun 4, 2012

    Hi,Where to park investible surplus is the million dollar question--at the moment, equities is a big NO though it may improve if we have consecutively encouraging quarterly results;fixed income returns barely cover the inflation;and gold has become unpredictable. Real estate seems to be good buy, especially land as it is a tangible asset, and historically land prices have never gone down. Of course land deals don't come cheap and they their own problems of liquidity, ownership conflict etc.regds

    Like (1)

    sunilkumar tejwani

    Jun 3, 2012

    As is common, during troubled times, one should invest a part of surplus funds in to safer instruments like PPF, government bonds or Liquid Mutual funds and a part in Gold to hedge against inflation and uncertainty in the economy. Once the economic problems are fixed and equity valuations come down to the historic lows then one should gradually start building up portfolio of good equity investments.

    Like (1)


    Jun 3, 2012

    Being an NRI i would park my funds in LIC INTERNATIONAL

    Guaranteed returns policy of 5.5% for 5 years in dollar

    terms so i dont have to worry about currency risk. Uncle

    Sam would make sure the dollar is steady against any

    currency by hook or crook .As for investing in equity

    around the world , the investors would watch the fund

    managers drive lambhorginis while he would sell one to

    buy a bicycle.

    Like (1)


    Jun 2, 2012

    cash is king ,for the time being go for fd's

    Like (1)

    sanjeev shah

    Jun 2, 2012

    We right now put surplus money in Fixed deposit and wait for right moment after sensing things are over or near to over and economic are starting to turnaround & postive then start nimbling the equities, but with caution & start with frontline stocks first.

    Like (1)
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