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'Zero'ing on growth

Dec 20, 2008

The authorities seem to be adopting every possible measure available in the book to restore confidence in the global economic system. Take the week gone by for example. The US Fed lowered its interest rates further and in the process, virtually exhausted the limit of its main weapon for enhancing GDP growth. The US government also did its bit when it finally decided to come to the rescue of troubled US auto makers. But when an economy is in the midst of a recession, it does not take long for bad news to emerge from somewhere, making investors once again go into a shell. This is exactly what happened in the US stock markets in the just concluded weak. Markets remained volatile throughout the week and ended mixed. While the Dow edged lower by 0.6%, tech laden Nasdaq advanced 1.5%. Things looked rather rosy elsewhere especially in the Asian markets as mouthwatering valuations finally enticed investors to abandon the dollar and invest in Asian equities. South Korean markets were the biggest beneficiary of this move, edging higher by as much as 7% during the week. Sensex, the Indian benchmark, also performed well as expectations of still stronger fiscal sops as well as further lowering of interest rates intensified amongst investors.

Since the bailout funds have not been sufficient to revive the US economy and prevent it from succumbing to another spasm of economic depression, the country's central bank has resolved to pump prime the economy. It is willing to do so even at the cost of flushing cheap dollars which could stoke inflation at a later stage. The Federal Reserve has cut its key overnight interest rate to a range of between 0% and 0.25%, and is prepared to sustain the unprecedented low levels for some time to come.

There are, however, concerns that even if this measure fails to deliver the desired impact, the Fed will have very few tools left to resort to for stimulating the economy. Although the central bank has already spoken of measures like purchases of long-term US Treasury notes, given the country's pitiable leverage position, it seems a risky proposition. In explaining the reason behind the rate cut, the Fed has stated that the US economy, which has officially been in a recession for a year, was in danger of getting weaker, and that the risk of inflation had decreased 'appreciably'. Other central banks, notably the Bank of Japan, have taken interest rates down to near the 0% level in the past.

Crude oil declined by a huge 27% during the week to US$ 34 a barrel. Gold prices edged 2% higher to US$ 838 an ounce. Crude oil has now come off 77% from its all time highs, sending huge shivers down the spine of oil exporting countries. Their latest attempt at shoring up the prices has also come a cropper. It should be noted that OPEC, the organization that supplies nearly 40% of world's crude had agreed during the week to lower output by a further 2.2 million barrels per day. However, oil prices have continued to tumble, much to their chagrin and looks like more production cuts could be on the anvil.

Source: Yahoo
Source: Yahoo finance
Source: Sebi
Source: Equitymaster
Source: Equitymaster
Source: Equitymaster

Movers and shakers during the week
Company12-Dec-0819-Dec-08Change52-wk High/LowChange from 52-wk High
Top gainers during the week (BSE-A Group)
MMTC 9,640 19,168 98.8%41,307 / 9,125-53.6%
HDIL 109 167 53.5%1,117 / 69-85.0%
GMDC 32 45 41.4%263 / 25-82.9%
India Infoline 39 51 31.0%395 / 34-87.2%
Educomp Soln. 2,088 2,732 30.9%5,650 /1,515-51.6%
Top losers during the week (BSE-A Group)
Satyam 221 163 -26.3%544 / 154-70.1%
Reliance Communications 249 216 -13.4%844 / 149-74.4%
Crompton Greaves 152 137 -10.0%410 / 106-66.6%
Spice Communications 36 33 -8.5%77 / 23-57.2%
HDFC 1,636 1,521 -7.0%3,257 / 1,202-53.3%
Source: Equitymaster

Economic policymaking across the globe is a really tough job. And the realisation has hit us strongly now than ever. Only a few months back, almost all of them were battling the demon of inflation. Now, all of a sudden they find themselves in the midst of the worst deflationary spiral in recent years. Hence, what has followed is truckload of incentives, both fiscal as well as monetary. While this may help shrug off the deflationary phase, it could well give rise to even higher inflationary pressure few years down the line. An investor's job looks way easier. All he has to do is invest in a company that is able to increase its prices in times of inflation and have steady demand for its products during times of deflation. If bought at a reasonable valuation, he could jolly well afford to omit the two dreadful words from his lexicon.

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