Stocks could go down a lot more - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Stocks could go down a lot more 

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In this issue:
» WTO's take on the global economy
» David Wessel believes that recovery will be painful
» The bow tie sporting maverick likes commodities
» Govt. employees to travel by Air India only
» ...and more!!

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The global financial crisis sent the US stockmarkets crashing in the last one year and hopes of an economic recovery have sparked a rally in the same. However, on being asked where the US stockmarket is placed currently, Robert Shiller, one of the most influential economists in the world, replied that the US was neither cheap nor expensive but was somewhere in the middle. More importantly, Shiller said that there was ample scope for the stocks to go down a lot more if the current crisis showed no signs of abating.

Given that the current crisis has been increasingly compared to the Great Depression of the 1930s, Schiller's rationale is that the stocks since 1929 were 80% lower from their highs and ever since the current crisis erupted, stocks have plunged 50%, which means that the possibility of a further meltdown cannot be entirely ruled out. He further advised that while it was important to have stocks in one's investment portfolio, it was also very necessary not to overly depend on them and that spreading assets over qualitatively different kinds of investments is what is important. Moreover, he stressed that the increasing level of globalization meant that we are living in a 'bubbly speculative world economy' and the world economy is in jeopardy because of what he termed as 'market chaos'.

In India too, the global crisis meant that stocks were available at bargain prices like never before. Having said that, there has been a considerable run up in the prices since the start of the year, and thus we believe that investors do a thorough bottom up analysis and invest only in those stocks which boast of strong fundamentals from a long-term perspective, always giving due consideration to valuations.

01:08  Chart of the day
India's XIth five year plan initially talked of spending a massive US$ 500 bn as infrastructure investment during the period 2007 to 2012. Without fail, the policymakers are already talking of scaling down this target. Given the painfully slow pace of execution of past projects, this should not come as a surprise!

As the following chart shows, on an average, around 45% of all central government infrastructure projects have run behind schedule. While this rate has come down (for the better) over the past five years (and has dutifully added to the country's GDP growth), the situation still seems appalling.

Source: RBI documents

Various individual experts and organizations are of the opinion that the global economy is far from a significant recovery and the latest to join this bandwagon is the World Trade Organisation (WTO). The WTO believes that while a recovery yet is still far off, not many countries have done away with their respective protectionist barriers. Falling corporate profits and rising unemployment have led to some countries imposing trade barriers to protect their countries, little realising that this could have an impact on global trade going forward.

In fact, as reported in a leading business daily, the director general of the WTO Pascal Lamy has remarked that import penalties and other border restrictions are closing off markets and causing more difficulty in a time of depressed demand. On the global economy, this is what Lamy has to say, "I would caution against excessive optimism. Although financial markets are showing signs of stabilizing, the crisis is far from over, in particular in many developing countries that are only now starting to feel its full force on their trade and economic growth." We couldn't agree with him more!

David Wessel, the economics editor of the Wall Street Journal also mirrors the views expressed by the WTO. He says that the worst of the crisis seems to be behind us and many economists are of the view that the global economic crisis which began in December 2007 should end in a couple of months. But the thing to be noted according to him is that the recovery will be so awful that US will not even realize that a recovery has begun.

The US economy itself has been sending out mixed signals. For instance, some positive news has emerged in that the exports are picking up, auto production and housing starts have not fallen as much as before and credit markets are healing. However, the caveat here is that unemployment has been soaring and is expected to remain high at 10% in the US through the end of the next year which is going to pinch Americans very hard. This is further supported by trends in the past that recessions caused by financial crises almost always take a long time to end, which is why the recovery is almost always painful and slow.

In such a scenario, how is the US economy expected to get going? After all, consumers are still thrifty and other global markets are not doing too well either, meaning that the US probably cannot depend upon them to bolster its economy. While the Fed on its part believes that it has done whatever it could do, another stimulus package announced by the White House may not hold much weight with the Congress as fears of inflation prevail. Therefore, the US certainly has a challenging task on its hands. We, for one, agree with Mr. Wessel that a crisis which has practically engulfed all countries across the globe will not translate into a quick recovery anytime soon.

His eponymous index may have come off by more than 10% since the last month but the man has shrugged it off as a normal correction and believes that the long-term case for commodities, the asset class that he prefers over everything else in sight is pretty intact. And his argument is indeed spot on. "If the world is going to recover, they (commodities) will recover first because of the shortages and if the world economy is not going to recover, they are still the best place to be, because governments around the world are printing huge amounts of money." We cannot help but agree. If you haven't guessed by now, we are referring to the commodities guru Jim Rogers, who made the above comment while speaking to a leading business channel recently.

Besides his continued bullishness on commodities, Rogers also stuck to his guns on his earlier comment that he foresees a huge currency crisis in one of the major currencies as he feels that the world is full of currency imbalances and economic trade balances would have to be resolved or corrected, one way or the other. When asked about equities, Rogers answered that he hasn't bought any stocks in the last couple of years except China and does not find equities, whether in emerging markets or the developed ones, superior to commodities.

It seems quite obvious that Rogers is betting on a potentially inflationary environment few years down the line. However, if it does not turn out that way and the global economy continues to be under a deflationary spiral then emerging market equities particularly India could well spring a positive surprise or two.

Parents, well-established in a profession often go all out in easing their children into the profession. So, we have film stars 'launching' their star kids and businessmen 'grooming' their children. The Government of India seems to be doing the same.

As per a leading business daily, the finance ministry has asked government employees to prefer the ailing state carrier Air India over other airlines for their official travel. It is aimed at providing revenue visibility to prospective lenders of Air India.

This move is not hard to understand given the financial mess the carrier presently finds itself in. It is debt-ridden and overstaffed. The National Aviation Company of India, which runs Air India, is likely to post a loss of around Rs 50 bn in FY09. However, we believe, this is a step away from liberalization of the aviation industry as a whole. Supporting an inefficient player, state-owned or otherwise, at the cost of others is definitely not the way to go.

Mirroring the trends in the global markets, the BSE-Sensex opened the day's proceedings on a strong note and continued to scale higher at the time of writing, led by gains in the metals and capital goods indices. On the global front, while key Asian indices closed in the green, European indices are also trading in the positive currently.

04:56  Today's investing mantra
"Although it's easy to forget sometimes, a share is not a lottery ticket... it's part-ownership of a business" - Peter Lynch
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5 Responses to "Stocks could go down a lot more"


Jul 15, 2009

A nice & thought provoking article indeed. The information from USA reaches us in small waves now and then - possibly a Tsunami may be waiting to hit. But if Rain God favours us & agri production goes up we can withstand.



Jul 15, 2009

No News about Goldman Sachs Record Profit... I m Suprised ...Any way the Study on FY Plan in INdia is interesting...



Jul 14, 2009

The directive of Finance Ministry that government employees should travel by Air India only is sheer protectionism and discrimination against private airlines creating a non-level playing field.By the same logic, Government employees should take life insurance from LIC only, take non-life policies from Public sector general insurance companies only, and should open Bank accounts in Public Sector Banks only.This is simply a ridiculous approach.The Government should rather think of divesting its ownership of Air India to private sector,if it cannot run it profitably.



Jul 14, 2009

Very informativeand simple to understand by anovice even


Dalip Singh

Jul 14, 2009

Very informative and very well wrapped.I agree that the aviation sector headed by lazy minister and lousy board should get out and should be privatized,this unionbaazi and corruption at the core will never see the light of the day if the govt attitude as is well known is in their hands.Go to Sleeep Mr, Aviation Minister

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