Dec 31, 2008|
Ten moments that will define 2009
- Great Depression? Nope. Not for India.
The world is more inter-dependent now. We all need jobs to buy food rather than produce our own. We all have bigger and more variety of bills to pay and loans to repay. Household expenses are much larger proportion of the income than what it was in the good old days. Well, while India might still stay away from a depression like situation in 2009, the chances of a prolonged slowdown are not out of the realms of thought.
- Lessons in survival for companies that do survive
The booming economy until the start of 2008 meant that companies across sectors had announced huge capex plans, in a bid to build their corporate empires as big as access to more funds would allow them. Most times this lead to leveraging an otherwise sound balance sheet, or then diluting equity. Companies did not leave any stone unturned when it came to raising funds for their ambitious plans. Indeed managers gave in to the temptation of expanding the scale of operations under them, most times at the cost of overlooking the sacred goal of enhancing shareholder value. The who's who of corporate India succumbed to this seduction. The Tatas are a case in point.Many behemoths of the corporate world that were once thought of as infallible are now extinct, especially in the developed markets. As we enter 2009, many more still stand precariously on the brink of extinction. The ones that do survive to see the light of 2009's days will be busy revisiting and reworking their core strategies. After learning some very old lessons the hard way, conservatism and cost cutting will be the name of the game.
- Obamanomics ...will it work?
While the US economy faces its sternest test in recent years, all eyes are set on President elect Barack Obama and his rescue plans for the economy. The plans are expected to cover all the weak areas of the economy with more spending on health, education, infrastructure and energy as well as tax cuts for the poor and middle class. We believe that with the extremely positive note that he began with, he just needs to keep the momentum going. The measures that Obama plans to take are prima facie in right direction and should help the economy revive in short to medium term. If successful it will mean, as we have now witnessed, better times for the global economy as a whole considering how closely knit most nations of the world have now become. However, the major problem with the US economy is its low savings rate, which needs to be increased to maintain a long term momentum in the economy.
With his extremely well receive motto of 'CHANGE', expectations are running high. We hope he will not disappoint.
- We're fine with the ox, but where's the bull gone!
According to the Chinese calendar, 2009 will be the year of the Ox. After being hit hard this year, investors must be definitely praying that 2009, along with the Ox, turns out to be the year of the Bull too. The global financial crisis and the subsequent meltdown in the stockmarkets in 2008 will forever be etched into the memory of investors. Will this saga continue next year? While it is difficult to predict the direction in which the stockmarkets will head, we can say that 2009 is most likely to be a year of damage control. Bailout packages are being announced by the dozen and interest rates are being lowered; all with the aim of spurring consumption and pulling the world from the slump. Assuming that there are no more skeletons in the closet, it will be interesting to see how these various bailout plans all over the world will pan out. Whatever be the case, for a long term investor, the current meltdown is the perfect time to get greedy and latch on to those good quality stocks that are available at bargain prices. This will ensure that in case the bull is back in 2009 itself, investors will be well prepared for it.
- Capex bust...reality will finally sink in
Pains of financial markets are already being seen in the real economy as growth in industrial production has slowed down considerably. We believe 2009 is not expected to be any better. The key issue plaguing investment spending is that growth depends a lot on the capex cycle of industries, which is on a downturn, chiefly owing to slowdown in demand and funding issues. We believe that the situation will take a while to improve for sectors that are in a need for new capex to fund growth. We have already seen some initial signs of project delays, postponements and cancellations in 2008. We believe things will become worse before they get better for the sector.
- Election Anxiety
The 'Black Monday' of May, 2004 is still vivid in our minds. Indices had tumbled like nine pins, triggering two circuit breakers in the space of few hours. A new government had been elected at the center and the market was worried that the pace of reforms initiated by the previous government would slacken or may not take place at all. The reversal however was short lived and rightly so. More than a decade preceding the event of 2004, India had embarked upon the path of liberalization and given the benefit it had brought, it most likely seemed irreversible. Today, as we once again stand at the cusp of another parliamentary elections, we can rest assured that both the major parties in the fray are likely to don the garb of 'reforms' with equal enthusiasm, albeit the mode of execution could differ. What if either of them is not able to win a majority or a Third Front comes up trumps? In that case, our guess will be as good as yours.
- Inflation: Still brewing beneath?
Having turned more heads in 2008, than probably ever before, inflation may continue to remain in the headlines in 2009. The term commonly used by economists, bankers and investments analysts made the common man 'economy savvy' this year. Even housewives tracked the figures on a monthly basis as rising EMI dues and higher grocery bills made inflation a household problem. Wholesale Price Index which is the metric on which inflation is commonly measured in India trooped dangerously close to its decade highs. The final months of 2008 although offering some notional relief on the inflation number, failed to reignite the consumption demand. The onset of 2009 is expected to do most of that.
But with the government willing to ignore its ballooning deficit to offer 'stimulus' to the ailing economy and its uncertain future, prudence on interest rates may take a backseat in 2009. Especially, with the Fed hitting ground 'zero' in its territory and other central banks trailing close to boost the market sentiments in their respective countries. Inflation, therefore, may temporarily cease to rear its ugly head even as fiscal and monetary measures make Indians once again flush with surplus funds. But what we remain wary about is that over the long term, this extra expenditure by the government on uses other than creating productive assets holds the potential of giving a fillip to inflation again.
- Astrologers required...not analysts
Leading business dailies and TV channels are now inviting professional astrologers and crystal ball gazers to predict the course of stock markets. One can't blame them, given how off-target the entire analyst community has been since the heady days last winter. The Sensex could reach 40,000, people predicted. Buffett once said, “We've long felt that the only value of stock forecasters is to make fortune tellers look good.” And they certainly are looking good now.
So if you want to know general market direction in 2009, consult your astrologer. At least they are more entertaining. But for conservative investors, it is the age old recipe: do your homework to locate companies of good quality and buy only at prices which enhance the odds of your success. Over time, you'll do well.
- War with Pakistan
India and Pakistan have traded angry rhetoric since the Mumbai attacks on 26/11. The tensions are running high between the neighbours on chances of a war. As seen in the past wars, during the China war in 1962-63, the Indian economy grew by only 2% and in both the wars against Pakistan (1965-66 and 1971-72) the growth was a negative 3.7% and 0.9% respectively. All the three years, a deceleration was witnessed and it took a couple of years before the economy recovered. With India already witnessing tough times from the effects of a global economic meltdown, a war could mean a disaster for the country. As per the economic think tanks, India would have to spend an estimated US$ 3 bn on troop movements alone. With rising fiscal deficit and slowdown, even a short conflict has the potential to push India deeper into a swamp.
- The Death of the Speculator?
Enough of the scary stuff! Let's have a look at the brighter side of the year that is to come. As they say, if life gives you lemons, make lemonade...
Amongst all the uncertainty about the coming year, there is one thing that is for certain. The nightmarish events of 2008 have made sure that there will be little, if any, speculative activity in the business world in 2009. A leading business daily reports - '23 stock brokers have opted for voluntary closure of their derivatives business on the BSE'. They are understandably shaken. It's obvious what their New Year resolutions are going to be.
The brutal whiplash of 2008 has hit the reckless breed of speculators hard enough to make them learn a very important (and hopefully enduring) lesson; speculation coupled with leverage is a fatal combination.
So here's wishing you a HAPPY & SPECULATION FREE NEWYEAR!
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