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Is the recession over? - Views on News from Equitymaster
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  • Aug 24, 2009

    Is the recession over?

    After the China led sell-off witnessed last week, Asian markets have opened this Monday on a strong note. Currently, the benchmark indices of Japan (up 3.1%), Hong Kong (up 2.1%), and Singapore (up 1.4%) are trading strong. Gains are also seen in Chinese stocks as the Shanghai Composite Index is up by around 0.9%. A dose of positive news from the US regarding improved performance of their housing market seems to be driving Asian stocks up today.

    As reported by CNN late last weekend, sales of existing homes in the US rose in July for the fourth straight month. Federal Reserve Chairman Ben Bernanke's words that the US economy is 'beginning to emerge' from recession are also aiding the overall sentiment. Now whether to trust Bernanke's views or not is a different question altogether. But investors these days seem to be having extremely short attention spans. When a new economic report in the US is released or an economist or government official comments on the economy, that drives the markets, and bad news from just a day or two earlier seems to be forgotten.

    It is pertinent to remember that all the rosy observations that come out of the central banks or government officials these days are 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.

    While the economic stimulus provided across the developed and developing world seems to be working as seen by rising sales of homes and cars across the US and China, as also rising stock markets in India, remember that we are still living in uncertain times.

    See for instance what Nouriel Roubini, one of the few economists who accurately predicted the magnitude of the world's recent financial troubles, has to say to those who think that the worst is over for the world economy. In an opinion piece he posted on the Financial Times' website yesterday, Roubini writes, "...there is a rising risk of a double-dip W-shaped recession."

    Roubini gives two reasons why what he says might come true.
    One, if central bankers and governments worldwide start taking large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into recession and deflation.

    And two, if these policymakers maintain large budget deficits, they risk higher inflation in the future that will lead to rise in interest rates, which will subsequently lead to higher borrowing costs for companies and consumers, which will then lead to a continued pressure on demand and therefore stagflation (a case where inflation is high while economic growth is less or negative).

    Remember, both these risks apply to India as well given the huge deficit the central and state governments have built up. Now with monsoons playing truant, the deficit is expected to rise even further as the government will try to add to its farm subsidies.

    So there you are. While some might have you believe that the worst is over for the global and Indian economy and stock markets, it is pertinent for you to be disciplined in whatever investments you plan. 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.

    By the way, we hope you have registered for our FREE Webinar on where you should be investing in current times.



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