In this issue:
» Mayhem in global stock markets
» Gloom and doom for commodities
» Crisis' bitter pill for healthcare
» End of 'Finance' specialisation at B-schools?
» and more...
The world just mourned the demise of Wall Street. We have been witness to scores of banks and investment banks being killed under the weight of their own mis-doings. Speculators who were ready to bet on any asset class (stocks, bonds, commodities) with their own and borrowed money have seemingly gone into oblivion. But have we seen their death as yet?
|| Have we just seen death of the speculator?
Not really, if one were to go by the words of Benjamin Graham the legendary investor who propounded the theory of 'value investing'. This is what he had to say about the Wall Street crisis of the late 1960s. The fact that these words hold significant relevance to today's scenario makes them even more compelling for investors to remember.
Graham said and we quote as today's investing mantra, "No doubt there will be new regulations and new prohibitions. The specific abuses of the late 1960s will be fairly adequately banned from Wall Street. But it is probably too much to expect that the urge to speculate will ever disappear, or that the exploitation of the urge can ever be abolished. It is part of the armament of the intelligent investor to know about these 'extraordinary popular delusions' and to keep as far away from them as possible."
Greed will come back. Irrational expectations from stocks and companies will again find their place under the sun. In short, the speculators will return. The imperative for you, the long-term investor, is to arm yourselves against them (speculators) by staying away from greed and getting over the fear factor.
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...and stick on the other. Probably this is the policy that governments and central bankers across the world must adopt. Having been badly bruised in the worst post-Depression crisis, the policy makers must restrain bonus hungry executives and corporate leaders from taking the economy's interest in their own hands.
|| Hold carrot on one hand...
A US$ 700 bn bailout is not every economy's cup of tea. Forget about India, even economies in the European continent may find it very difficult to get out of a problem of this magnitude. Hence it goes without saying that we need to be more careful.
Thankfully, at least the RBI is. Since 2005 the Indian central bank had the foresight to increase risk weightage on real estate loans. While the RBI invited foreign banks to set up wholly owned subsidiaries, they were not allowed to bring in their exotic products. Indian banks that ventured abroad had to keep themselves sufficiently capitalised to protect depositors' money (as per Basel II norms). Unable to rein in the scorching loan growth to the risky sectors and estimating a higher default rate in such loans, the RBI tried to prohibit such lending by raising interest rates.
Nevertheless, we have our own set of 'potential Lehman Brothers and Bear Stearns' that have mis-sold exotic derivatives to greedy corporates and accumulated NPAs from aggressive credit card lending. Fortunately, the proportions are much smaller. While the Indian banking sector may be far from a US-like collapse, not using the stick occasionally may not be a good idea.
...there was mayhem in stock markets across the world today. Asia opened the day on a weak note and selling pressure intensified as trading progressed. From a decline range of 2% to 4% in the morning, most of the Asian markets closed the day down anywhere between 4% and 6%. Indonesian markets in fact closed 10% down. The Indian BSE-30 index ended with losses of over 720 points, led by metals, power and oil & gas stocks.
|| In the meanwhile...
European stocks too have opened their sessions deep in the red, as stocks are down in a range of 5% to 8%. Deepening of credit crisis in Europe and weak employment data from the US are said to be reasons for today's decline in stocks across markets.
As reported by Bloomberg, 159,000 jobs were lost in the US in September, the most in five years. Around 1.1 m jobs were created last year in the US. 760,000 have been lost in the first nine months of this year. The biggest decline has been recorded in the financial services space, which has seen the demise of behemoths like Bear Stearns and Lehman Brothers.
From stocks and bonds, it's time to say good bye to the heydays of commodities. As reported by Bloomberg, commodities markets are heading for their biggest annual decline since 2001. This is on the back of reduced demand due to slowdown across economies as also due to exiting of leveraged bets by speculators.
|| Gloom and doom for commodities, say experts
The report cites research from Merrill Lynch which estimates that crude oil might plunge to US$50 a barrel next year. It has also mentioned the 12% and 18% cut in copper and aluminium prices respectively forecast by Goldman Sachs in the next twelve months.
Meanwhile, oil has fallen below US$ 90 a barrel to its lowest in eight months. Prices of the commodity have in fact dropped nearly 40% from a peak of US$ 147 on July 11. Gold is up at US$ 854 an ounce, boosted by the metal's safe haven nature.
The impact of financial crisis in the US and Europe is now being felt in sectors far and wide. Healthcare is the latest example. Bloomberg and a leading business daily reports that India's leading pharmaceutical company Dr. Reddy's is facing delays in the much-awaited launch of its diabetes drug called Balaglitazone. This is because Rheoscience A/S, the Danish firm conducting clinical trials on it has run into financial problems.
|| Crisis' bitter pill for healthcare...
However not all hopes are lost for Dr. Reddy's as Rheoscience's parent company Nordic Bioscience is likely to take over the trials if the former ends up being liquidated. Importantly, Balaglitazone is a drug considered the closest to being launched by any Indian pharmaceutical company. The drug is intended to be used in treatment of type-2 diabetes, a rising ailment among urban Indians.
As mentioned on the website of the International Diabetes Federation, lifestyle diseases like diabetes (type-1 and type-2) and heart diseases are expected to put a heavy burden on the economies worldwide. The cost on India alone is estimated at US$ 333 bn over the next 10 years.
With big investment banks in the US collapsing under the weight of their own mis-doings and Indian banks feeling the pinch of slowdown, 'finance' specialisation at Indian business schools (B-schools) seems to be going out of flavor among students. A leading business daily has reported that the proportion of students opting for 'finance' is set to dip in the ensuing batches if placement prospects in the sector do not look up in the near future.
|| ...and for B-schools
Given than banking (mostly investment banking) and consulting have been the hot career streams for B-school graduates over the past few years (see IIM-Ahmedabad's statistics in the graphs above), failure of business houses worldwide in these areas will definitely have a negative impact on B-school this coming season. As per reports, more students are now opting for branches like retail, hospitality and general management!
As per a study published by the Pan American Journal of Public Health, violence causes US$ 150 bn in annual economic losses worldwide, more than the losses on account of diseases like diabetes and malaria. According to a study, violence is a major drag on developing economies. Suicides and murders (homicides) account for 54% and 35% respectively of the 1.6 m victims of violence. The remaining 11% deaths are on account of violence inflicted by larger groups such as organised political groups and terrorist organisations.
|| Violence costs lives...and a lot of money|
Interestingly, India contributes to 21% of worldwide suicides and 10% of homicides, making the country among the worst sufferers of violence.
"We are in a bear market," is what we hear from global financial experts these days. And its duration has become their favorite topic. Well, the end of every bull market signifies the start of the bear market. Hence, the opposite should also be true. However, somehow nobody seems to be talking about the same.
|| Do you have an iron stomach?
There is enough evidence in history that an investment during a bear market has led to some of the biggest wealth creation over a period of 5-6 years. But these returns have come with their fair share of pain. Someone has rightly said that in investing, one does not need great intelligence. An average intelligence supported by an iron stomach will do the trick.