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Living in a make-believe world? - Views on News from Equitymaster
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  • Jun 22, 2009

    Living in a make-believe world?

    After a dull close to last week, when they declined in a range of 4-5%, all Asian markets are up with moderate gains to kick off this new week. While commodity stocks continue to trade weak following decline in prices of copper and oil, most other sectors are trading amidst strength across Asia. This follows the International Monetary Fund's (IMF) forecast of a 'modest' improvement in the world economic growth climate. "Financial conditions have improved, confidence has recovered gradually and indicators of production and demand have firmed," said a senior representative from the IMF yesterday.

    This is interesting given that as recently as last week, another world financial body - the World Bank - had outlined that the global economy will contract even more sharply than expected in 2009 and would shrink by nearly 3%, which was higher than its estimate of 1.75% made just a couple of months back.

    We wonder with the US economy still going downhill, and not respite in sight, how come IMF has upgraded its world economic outlook. Things are not really exciting out there in the world's largest economy, and also the world's largest debtor. The housing sector remains weak, unemployment continues to rise, the government continues on its borrowing binge, consumer demand remains in doldrums as people have started saving more, and companies are not doing well for all these reasons. In short, there're no real reasons to cheer.

    While we might not want to sound like doomsayers for spoiling the investors' mood, the things happening around makes us wonder whether we are living in a make-believe world. See for instance the government's balance sheet in India, which is also in a mess. The deficit (government's expenditure minus its income) has risen to record proportions and given the euphoria surrounding a 'stable government', the public servants in Delhi are more vulnerable to making more of those mistakes that led to a galloping deficit in the first place.

    Some media men are projecting this year's budget to be the 'biggest budget ever'. For what? For the size of our fiscal problems, or for the sheer count of those involved in the budget making exercise itself? Expectations are running high for the finance mister to spell out the 'reform package' and investors might turn euphoric or despondent going by what the minister actually delivers on July 6th.

    For you dear reader, we can wish for sanity, caution and discipline in whatever investment decisions you take. The stock markets might be euphoric over the next few weeks, as they have been in fourteen of the past fifteen. But you need to stand still and weigh your stock investing options very carefully, and only after considering the environment around. And more importantly, the company's real worth.



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