Niveshak November Issue

Thursday, November 26, 2009 , Posted by Team Niveshak at Thursday, November 26, 2009

Dear Niveshaks,

As the Sensex kisses the 17,000 mark and the DJIA fiddles with the 10,000 level, it may seem that the Bull which almost seemed to be resting in peace for the past six quarters, has returned. Economists and Analysts have started to have a short look back at the reason of the crisis, a deep look at the extent of its effect on the world economy and a long look at the road to recovery ahead. But in this discussion, did we notice one thing – Recovery is taken for granted. Can we afford to take this as granted? Let me throw a word of Caution.

Huge bailout packages, lowering of interest rates and opening of multiple liquidity windows to flush out the menacing bear from the markets has created a huge problem. Firstly, this has pushed most of the countries into a severe fiscal deficit, in the 8-10% range which may take governments a couple of years to bring them down to 2-3% range. This can have fatal impacts leading to lesser government spending in the next few years leading to lower growth rate. The value of major currencies with the dollar has been very volatile over the past few months. Problems with huge inflow and outflow of money, heavy volatility in currency values, fiscal deficit prevailing in most of the countries may lead them to taking drastic measures on capital account convertibility. So the possibility of a Currency bubble also may not be ruled out.

The billions of dollars bailout packages rolled out in the west found greener pastures in the emerging economies. As a result, these economies defied earnings positions of companies & negative market forces and continued to rise up since March’09. The BSE Sensex for instance was trading at 8-10 times P/E during the recession is now trading at 21 times P/E. This can be attributed to the formation of an asset bubble in the emerging economies. When liquidity starts to dry out, investors will be seen running for cover pulling down the market.

In its last quarterly review, Reserve Bank of India, the regulator, marked an end to the easy money era which was continuing since the recessionary times. Now credit would not be as easy as it was until now. This so-called start of liquidity squeeze may have an impact on the expansionary plans of corporate India. This month credit growth recorded single digits for the first time in last fifteen years. This is not just the case in India, many economies of the world have tried to control fiscal deficit and overheating of economy due to drastic recovery steps by marking an end to the easy money regime. Now this may stop the economy from recovering at the rate at which it was earlier expected.

Earlier we have mentioned that the Chinese have set out on a misadventure of going on a buying spree and have been stock piling inventory which was then available at a very low price. Now this led to rise in commodity prices all over the world. Indicators like the Baltic Dry Index pointed that there in heavy shipping of commodities across the world. No one was wrong. But the reason was deceptive. There was not much increase in consumption in China, rather it was stock piling for future use. After a few days, the largest buyer in the commodity market will be on leave and consume from its stockpile.

Now as the dust settles and the smokes clears, we join the dotted lines and one thing will become clear - The recovery in was not for real. We may fall back again but not as much as we fell last time but after that the recovery will be real. Let us wait for the best times to come back soon and in the mean time let us go through some really insightful articles that our friends from across all B-Schools have penned down. Hope you find this an interesting read.

Happy Investing!
Biswadeep Parida

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