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Is the worst really over? - Views on News from Equitymaster
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  • Aug 17, 2009

    Is the worst really over?

    After closing the last week in the positive, stocks across Asia have opened today in the red. The benchmark indices in Hong Kong (down 2.9%) and Japan (down 2.4%) are currently trading deep in the negative. An 'unexpected' decline in the US consumer confidence index and lower than expected GDP growth in Japan are said to be the culprits of today's fall.

    Interestingly, this sharp fall in Asian markets today comes just in the wake of economists' observations that the worst is over for the global economy given the rebound in US and European regions. As commented by an economist on Bloomberg, "There's broad enough stabilization in the economy to get a decent rebound. We're seeing multiple signs of a bottom in the housing market and by this time next year, homebuilding should be adding to growth."

    Guess what? These rosy observations come at a time when the economies of the US and Europe continue to shed jobs on a mass scale and consumers, wary of splurging all over again, are saving more than they are spending. As these consumers go on a saving spree thereby leading to less demand for products that companies make, a lot many of the companies are going bankrupt. The proof US bankruptcy filings rose 38% year on year (YoY) in April-June 2009 period, according to data released last weekend.

    More than 16,000 businesses filed for bankruptcy during the quarter, the highest in a three-month period since 1993, according to the American Bankruptcy Institute (ABI). And ABI experts now predict that total bankruptcy filings could reach 1.4 million in 2009, which would be the highest since 2005.

    This clearly shows that we are still living in uncertain times. Clearly, the stimulus provided in the developed world isn't working, or so it seems. And therefore, stock markets will remain volatile in the near to medium term.

    See for example Japan, where GDP rose 3.7% YoY during the quarter ended June 2009. This is the first time in five quarters that the Japanese economy has grown. Despite this, stocks there are deep in the red today on worries that this growth is unsustainable, and that the economic stimulus is not likely to work wonders for a long time because...well, consumers continue to consume less and companies continue to face over-capacity issues.

    What about India? While the Prime Minister and his team is confident that the economy here will bounce back and 'witness a 9% growth' by this year end, we remain skeptical. This is especially given the weak monsoon this year that is likely to cut short recovery in consumption demand from rural areas.

    While the government is making the right kind of noise by talking about increasing investment in infrastructure and social development, our history of implementation of promises (which are actually not implemented) leaves a lot of doubts in the mind. It is not only the willingness of the government to execute on time is what worries us, this time the issues are also of capacity.

    Given its strained balance sheet, does the government have the necessary resources to build India over the next 5 years? We have no answers. Only time will tell.

    Coming to the Indian markets, stocks have gotten expensive after the sharp run up seen since March. While corporate profitability during the June quarter has surprised us in the positive, we remain concerned about the sustainability of the same. Also, while investors can still find valuable stocks for long term investment, such a universe is shrinking by the day. At these times therefore, you need to take every step with utmost caution.



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