Tuesday, October 21, 2008

Not the bottom - but trough of a cycle - and a time to invest

This is not the bottom, but is the trough part of a cycle and the right time for an investor to get back to market.

What will happen next

  • Below 10K, all levels would be driven purely by fear.

  • There is now a 60% chance of a 8K breach. The bottom will be when there is utter hopelessness. There is still hope in the markets and this is not the bottom

  • For the Indian economy and corporates, Q2 to Q3 '09 will be the worst - likely that some big names will cease to exist and many more will go into losses

  • From now on till Sep '09, Sensex is likely to range anywhere from 8K to 15K on the upper side.

  • For the next one year, Sensex will be extremely volatile. It will reach a new bottom - will touch those bottoms more than once - and will have many false rallies

  • Sustained bull run is likely to start only by beginning of 2010 - will be very slow at first and then start picking up speed.

  • For the long term investor (with a 7 years type of holding window) this is the time to go all out. And the long term investor should not fear even if his/ her value of investment go down by 50% over next year or so.

  • For the more active trader/ investor levels upto 15K Sensex will offer great short term trading / investment opportunities

  • On the upside , my estimates remain same as earlier for Sensex : likely to go up to 40K (min 25K) by Sept 2013 and 80K (min 45K) by 2016

Drivers for the bull run

  • The bull run in India will not pick up speed till the US housing markets have run their course - either there will be trillions of dollars of foreclosures or the US government has to write down those amounts - the third options would be pure horror and a repeat of a Japanese style 10 year slowdown

  • Around the same time that the US housing markets have run their course, I expect the European and Japanese economies to start stabilizing

  • India / China would start coming up as new consumption centers - however in the near term, India GDP likely to come down to 5% levels before it starts rising

  • I expect that a couple of years from now, major global economies will start going into their next up cycle – nearly all of them almost at the same time - that's when the bull run will start accelerating - I also expect the up cycle to peak around 2016

  • US will continue to remain the world super power -however India /China / Brazil / Russia and Europe will start coming up as new power centers

  • And then, it will be time again for the next down cycle in the world economies

Thursday, October 9, 2008

Will the Government bite the bullet?

India is following US with a 6 month lag. Fortunately we don't have the kind of credit crisis that US is facing now .

Nevertheless, growth would be significantly impacted across sectors. GDP to go down to sub 5% levels. Profit hit for nearly all Nifty scrips, with some going into losses.

Also, we too have a liquidity crunch similar to the US, though not so bad. Unless the government acts fast, Indian credit markets risk a shutdown and the economy risks going into a recession/ near recession.

US Government stayed on the sidelines for too long. The bailout and the rate cuts should have come around beginning of this year.

Though we have very competent economist at the helm (and I have a great personal regards for them) , still the Indian government is doing exactly the same thing as the US government did 6 months back - stay on the sidelines - take half hearted measures - and provide optimistic sound bytes.

Government to immediately do the following - (exactly Prof Nouriel Roubini recommendations for the US) - if we are to avoid a recession / near recession (significant slowdown is now certain) :-

  • Immediate cut in CRR to 6% and to 4% in a months time. Will infuse liquidity. Also cut bank rates by 2% to 7% and SLR by 5% to 20% in a staggered fashion over 4 to 6 weeks.
  • Unlimited protection of savings in banks for the next two years without limit. Will create confidence for account holders and avoid a run on banks
  • Increase spending in Infrastructure. To boost incomes, GDP and keep economy in track
  • Direct funding to commercial enterprises and banks by opening a lending window against collateral of securities. Can be routed through any one of government's funding arms.
Yes, inflation will increase, but a recession/ near recession will be staved of.

Will the government bit the bullet with elections not so far away? US government did not do it 6 months back. Now with its back to the wall, election or no elections , it has just no choice.

Tuesday, October 7, 2008

Economy and Markets : Recalibration begins

This is the very beginning of recalibration of Economy and markets (Indian as well as global). Things will get far worse and the process will be painful. People's day to day life is going to be impacted;  for some, very severely. However a time of great opportunity for the long term investor. A decade from now Indian economy will emerge far far more stronger.

Stock Market outlook
  • No change in my assessment. Given a 12K breach, there is now more than 70% chance of a 10K breach
  • On the upside , my estimates suggest that Sensex likely to go up to 40K (min 25K) by Sept 2013 and 80K (min 45K) by 2016

Investment Strategy
  • Begin Accumulation. If you have Rs. 100 in free cash, invest Rs 50 right away. Remaining Rs. 50 post 10K breach. Monthly savings – hold off half for 10K breach and use the remaining for regular accumulation.
  • Existing holdings – Hold on to existing investments, unless you need cash urgently. Be ready for a long haul.

  • Be ready for a seven years kind of time span.

Key Drivers : Global Economy

  • US in recession : the question now is not if so, but,  how bad will it be and will the country go into a depression.
  • Credit markets : in US and Europe have absolutely frozen out. Nobody is ready to lend to anybody. There is a deeps sense of mistrust. Banks, corporates and even government bodies are looking at severe cash crunch.  If the liquidity situation does not improve in next month or so, US risks a complete economic shutdown, similar to the great depression of 1929.

  • US financial markets: At best there will be complete restructuring and at worst a complete meltdown. More big names will go down under

  • Europe / Japan : Europe and Japan already in recession like states. Japan Q2 GDP contracted 0.6% QoQ. Europe growth estimates for 2008 at 1.7% and falling.

  • China – in slowdown mode, similar to India.

  • Global impact of US and Eurozone meltdown/ recession : Economies across the globe would be impacted significantly though by differing degrees. Global slowdown certain, global recession likely.

Key Drivers : Indian Economy

  • GDP Growth : 5% or lower levels over next two years
  • Slowdown across all sectors. As is the case in all downturns , the hardest hit would be the cyclical and commodities sector.

  • IT/ BPO : Margins coming down. Outsourcing will become more difficult as US/ Eurpoe jobless claims mount.

  • Steel / Cement / Mining/ Refining /Commodities: Will be worst hit as the price cycle takes a downturn.

  • Banking : Will be badly hit. Credit offtake falling , margins getting squeezed and defaults rising.

  • Telecom / Pharma / Consumer goods : Not so badly hit. Though growth rates will come down with varying degrees.

  • Capital goods : Badly hit. Corporate will hold off capital goods investments.

  • Infrastructure :  Growth will slowdown. Government will be short of cash to fund projects till the economy goes on a recovery path.

  • Auto / 2 Wheeler : 4 Wheeler will be badly impacted. 2 Wheelers less so.

  • Labor prices : Salaries, bonuses and increments would be adversely impacted.

  • Labor market  : Layoffs will start in H1-09.

  • Land prices : Prices will come down. Distress sales likely by developers as even the big ones will run out of cash in 18 months. Some will go bankrupt.

  • Interest Rates : Will start coming down. In a couple of years we'll again see housing interest rates at 6% levels.

Thursday, October 2, 2008

Bailout Package wont work

Bailout package or not, US will face a recession and there would be significant impact on financial markets across the world, accompanied with a global slowdown.

The package does not address the core issue of mortgage holders' inability to able to pay back their debts. Instead it focuses on recapitalizing troubled institutions by buying back their toxic debts. Recapitalization is required, but should not be the first priority. The proposed increase in bank deposit insurance from $100,000 to $250,000 will not be enough to contain a run on the US banking system. I can go on and on.

The package will provide only temporary respite, and at this rate the US financial system risks a complete systematic meltdown.

As somebody rightly said ' The package is by Wall Street bankers for Wall Street bankers for problems initially created by Wall Street bankers'..!