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.