Recovery will be weak, anemic, subpar - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Recovery will be weak, anemic, subpar 

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In this issue:
» Hedge funds are back in business
» IEA ups its crude forecast
» World Bank expects the global economy to worsen
» Is the slowdown catching up on the telecom sector?
» ...and more!

The doomsday scenario for the US dollar is getting wider acceptance. Now, Nouriel Roubini or as he is widely known as 'Dr. Doom', believes that the dollar's status as the world economy's sole reserve currency may deteriorate. Bloomberg has reported Roubini as saying, "We may see complementary reserve currencies. While it's not going to happen overnight, the development will diminish the role of the dollar over time."

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As you would have known, the dollar's status has recently come into question as policymakers in Brazil, Russia, India and China (BRIC) have voiced their concerns regarding the ballooning budget deficit that will keep the US dependent on foreign financing. China, for that matter, owns around US$ 744 bn of US Treasury bonds among its US$ 2,000 bn of foreign exchange reserves.

About the economic recovery, Roubini said, "Recovery will be weak, anemic, subpar. Optimists are getting ahead of the curve and advanced economies are going to grow at a very slow rate after the recession is over."

Taking cues from the warnings of the likes of Roubini, the BRIC nations are planning to shift some of these forex reserves into International Monetary Fund (IMF) bonds. Apart from their fear of a deepening dollar crisis, this move from these nations is also to demonstrate their growing financial clout. As reported on Bloomberg, while Russia and Brazil intend to buy US$ 20 bn of bonds from the IMF, China will purchase US$ 50 bn. India is also likely to follow suit, buying up bonds along similar lines. All of the four nations are keen to have a stronger voice in international institutions, the IMF being one of them. And why not? If what was predicted by Goldman Sachs in its famous BRICs report indeed does take place, then the voice of these nations can certainly not go unheard.

Crude oil spike in recent times
Source: CNN
The world's premium energy advisor, the International Energy Agency (IEA) marginally raised its global crude oil forecast on signs that the economic slowdown is lessening. It may be noted that this is the first time it has done so in ten months. However, it has also stated that this revision does not necessarily mean that the global economy is recovering, and that they may signal the bottoming out of the recession. The agency has revised its estimates for the year, predicting consumption to increase by 120,000 barrels a day over the previous forecast, taking the total to 83.3 m barrels a day. However, it also added that consumption worldwide will contract by 2.9% from last year. Yesterday, after the IEA's report was published, crude prices crossed the US$ 72 a barrel mark for the first time in seven months.

The epicenter and cause of the credit crisis might have been the US, but it is Europe who seems to be the one paying a higher price for it. A New York Times report throws light on the fact that though signs of stabilisation are emerging in the US, economic reports in Europe continue to remain as gloomy as ever. Part of the reason for this divergence in performance is said to be the two countries' different approach to solving the crisis, to the extent that some private economists are even said to be predicting that the American economy will resume growth in the fourth quarter, while Europe's economy is expected to remain in recession well into 2010. This, after contracting an estimated 4.2% this year compared to an expected 2.8% decline in the US. Though the methods adopted by the US to pull itself out of recession may seem to be working well in the short run, as far as their long term sagacity is concerned, only time will show us their prudence.

GSM monthly additions
Source: COAI
The telecom industry was thought to be one of the very few sectors that were unfazed by the economic slowdown. In fact, the industry added its highest ever monthly subscribers in March 2009 (about 11 m GSM subscribers). However, rumors that the slowdown seems to have caught up with the sector have started floating as the Cellular Operators Association of India (COAI) recently announced that the telecom operators added nearly 8.3 m GSM subscribers during the month of May 2009. This would be its second sequential decline on a month on month basis. Going by the relatively longer trend though, it does seem a tad too early to call it a 'slowdown'. It may be noted that the subscriber additions recorded towards the end of FY09 were on account of some aggressive plans introduced by selected operators.

Hedge funds are back in business. An index that tracks more than 2,000 funds has revealed that the hedge funds have returned an average 5.2% in May, touted to be the best performance in nearly a decade. Not only this, for the first time in nine months, the industry has witnessed positive net inflows to the tune of US$ 1.5 bn, said the study put up on the Bloomberg website. The report further mentions that hedge funds in Asia have emerged as the best performer, surging 9% as money flooded back to regional equities on the hope that recovery, if any, will first take place in the continent's economies. Thus, while the hedge funds may have outperformed the regional benchmarks, we remain skeptical of their ability to do so consistently over a long-term period on account of the frictional costs involved and the hedge funds' focus on short term performance. For the record, the same community had posted the worst year on record in 2008. Thus, their outperformance this time around could be a case of rising tide lifting all boats.

Going by the predictions and forecasts set by the IMF and the World Bank, it seems as if they are not on the same page. The World Bank has predicted the scenario to worsen as it expects the global economy to contract by nearly 3% in 2009, higher than its earlier prediction of a 1.7% contraction. The rationale given for the same is falling exports, remittances and foreign investments in the developing markets. On the other hand, the IMF has raised its 2010 global growth estimate from 1.9% to 2.4%. It believes the large stimulus packages announced by the developed nations to be the key reason for the same. However, the agency also confirmed its prediction of the world economy shrinking by 1.3% in 2009.

The Indian markets ended the day on a weak note today as the BSE-Sensex ended lower by around 170 points, while the NSE-Nifty ended lower by around 50 points. As for global markets, other Asian markets ended the day on a mixed note. At the time of writing, the European markets were trading on a mixed note as well.

04:45  Today's investing mantra
"You ought to be able to explain why you're taking the job you're taking, why you're making the investment you're making, or whatever it may be. And if it can't stand applying pencil to paper, you'd better think it through some more. And if you can't write an intelligent answer to those questions, don't do it." - Warren Buffett
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2 Responses to "Recovery will be weak, anemic, subpar"


Jun 12, 2009

This is a comment on your article of 11 June 09 'Has the Sensex run out of steam?'as this 'Comment" facility was not there with that mail reference

Thursday, 11 June, 2009 4:34 PM
From: "The 5 Minute Wrapup"
To: "Reader"


This is the first time I have been able to find an excellent empirical reference linking economic fundamentals, GDP, to the Sensex. Based on this I analyse and comment that the effect of rate of growth of electricity consumption is the real key and a correlated metric for GDP growth. Here is what Dr Anil Kakodkar, Chairman Atomic Energy Commission has said about this very vital linkage at the IAE Conference in Paris in June 2005:

“……Energy is the engine for growth. It multiplies human labour and increases productivity in agriculture, industry as well as in services. To sustain growth rate in economy, energy supply has to grow in tandem….”

Indeed Sensex coupled to Electricity Installed Capacity Growth Rate could be a truer representation of market reality in India. Perhaps your 5-Minute Wrap Up might spread awareness about this key index to the business community and its leaders in India and I suggest potential solutions to accelerate market growth as follows:

1. From your Web Site: 10-12% GDP growth rate = 27% growth rate for companies = 12-13% returns on a CAGR basis.
2. From the Elasticity of Energy to GDP Growth: 10-12% GDP growth rate = 8-9.6% electricity capacity buildup growth rate
3. From Authentic Sources India’s actual electricity capacity growth rate in 2008-09= 2.4%
4. 2.4% electricity growth rate = 2.4 to 3% GDP growth rate
5. Hence Returns on a CAGR basis= 2.5 to 3.9%
6. The most optimistic returns on a CAGR basis from the Sensex might be 5% and India companies growth rate will be restricted to about 11% per annum without an energy crisis being recognized by government and industry AND ACTED ON.
7. Last year South Africa declared an Energy Emergency” as its critical industries were not receiving adequate electricity.
8. Perhaps it is time for Business Leaders in India to being this to Government of India’s notice. India is not fond of the word “Emergency.
9. The truth is that the electricity powerplant capacity infrastructure build up is experiencing a 68% shortfall in achieving planned targets. Government’s 11th Five Year Plan target is 11,000 MW per year (from all sources, coal, nuclear and hydroelectricity); actual achievement is 3543MW in 2008-09.
10. Finance to build up power sector infrastructure is not the problem. Nor is re-rating the Sensex going to address the fundamentals of this problem!
11. Industrial management in India is the problem. Centralized direction & control from New Delhi is not serving the purpose of achieving powerplant capacity build-up targets, as admitted by the Planning Commission itself!
12. Potential Solutions Some elements of a quick and effective solution:
a. With a single change in the Railways Ministry, Lalu Prasad Yadav, the entire railway system in India was transformed. Surely government and industry can find another Lalu Prasad to take over the Power Ministry?
b. Merge the Ministry of Renewable Energy Resources with the Power Ministry so that the constraint of ‘silo-mentality” is removed and the Power Sector is transformed into large scale applications of renewable energy
c. Expanding & new public and private industries need to be supported with massive investments from government and FDI encouraged in a big way for wind and solar power.
d. Only 30% of r electric power requirements for expansion of existing industries or creating new industries should be met with existing coal,nuclear,hydro electric sources. The industries should be encouraged by incentives to find the remaining 70% of their power needs by themselves. This is an immediate requirement


N.S. Rajaram

Jun 12, 2009

The Chinese and to a lesser extent, the Japanese are buying up commodities but their exports are sinking. This doesn't foretell a strong recovery. It also suggests that they are unloading dollars and stockpiling on commodities with the expectation that the dollar will continue to sink and commodities will become more expensive. This too will affect recovery

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