This is the cover story that appeared in the September issue of Wealth Insight magazine, charting the way the global financial crisis played itself out and the reasons that have propelled the recovery, especially with an eye on India.
It's over! We're out and the world hasn't come to an end. The worst economic crisis in living memory - and the only truly global one ever - can be laid to rest. The road to prosperity we left behind is still long, but there is no doubt that we've started our journey and the future will be much brighter than the immediate past was.
But the pace of recovery surprised everyone almost as much as the initial meltdown. Indicators, worldwide in general and the developed countries in particular, point to the fact that the bottom has been found and economies are bouncing back.
CHANGING OF THE GUARD
This time, the difference is that the most populous countries in the world have taken on the mantle of effecting the recovery. India, is among the leaders of the pack rushing towards another boom cycle. A rampaging bull run on stock markets, rising numbers across a wide swathe of segments in the economy, and creditable corporate quarterly numbers have made for a major money-spinning mix.
Emerging markets, especially India, went through the recession relatively unharmed due to a lesser dependence on exports and a vibrant local demand-driven economy. As a result, such economies are rising into a recession-free era much faster.
The economic power-shift has been visible since the US-caused global financial crisis showed itself. Now, every investor/trader/expert/analyst worth his name besides factoring into any and every equation that he calculates how the developed world is doing also analyses the large-economies of the emerging markets. The surprise that awaits there is that they have beaten countries like the US and those in Europe and Japan to become significant factors in the global recovery efforts. And they are doing much better-than-expected. Just consider: East Asian economies have logged an average growth rate in excess of 10 per cent in the second quarter. Seen in the aggregate, developed economies of the G7 have actually shrunk by 3.5 per cent. In individual cases, India and China are some countries whose economies kept on expanding, albeit at slower rates, even though the globe was in a meltdown phase.
Emerging markets have also impressed by logging a gain in excess of 30 per cent in the second quarter regarding industrial production, bolstering analysts projections of a 'V' shaped recovery — indicating that the monetary and fiscal stimulus measures have helped jumpstart their economies by boosting demand.
More than that, Asian people's habit of shunning debt to a large extent and spending within their budgets, also means that when they got some extra money they went out to spend it on goods and products rather than on paying back the loans (unlike in the West), thereby boosting corporate results. While India's gross domestic product (GDP) growth rate was 6.7 per cent for fiscal 2009, expectations are that growth at a respectable 7 per cent will be logged for the current fiscal, say a number of investment banks, including Goldman Sachs.
Bolstering the recovery talk are the steadily increasing industrial recovery and increased government spending numbers, which have jacked up the actual economic growth (GDP) figure to 6.1 per cent for the first quarter of the current fiscal. This was the third straight quarter that GDP numbers have risen, last time (Jan-March quarter) the growth figure was at 5.8 per cent. The October-December 2008 quarter saw another hike of 5.3 per cent. Industrial sector grew by 5 per cent and agriculture grew by 2.4 per cent in Q1FY10. The best growth figure was charted by the services sector(accounts for 57% of total output) grew by 7.8 per cent in the June quarter. China notched up a growth rate in April-June quarter of 7.1 per cent, while Brazil growth reduced to 3.1 per cent.
The US, the growth engine of the world, looks to be doing fine too, relatively speaking. Even though its GDP fell by 1 per cent, the rate of the fall in economic growth figures has reduced. The latest cause for cheer there was the fall in the pace of unemployment rate (hovering under 10 per cent), while productivity was at a new high and labour costs were down and some very big corporate names announced huge quarterly gains.
A source of new growth is also seen in the improving corporate order books. With most CEOs paring their inevntories to bare minimum over the last 2 years, now they have exhausted all reserves and will have to order more from manufacturers. That means production figures will rise. Germany, France and Japan, have all showcased some positive numbers too.
REASONS FOR RECOVERY
The quick recovery is due to the response by central bankers across the globe, from RBI governor D. Subbarao to Ben Bernanke, the current Chairman of the Federal Reserve. They have been able to marshal their resources well to engineer what looks, at present, a miracle.
On the corporate front, globally, managers have been able to implement plans that have looked towards better investments and working practices as well as make viable adjustments in the way that they do business to enable a successful repositioning and make for a better and cheaper way of working rather than opting for job cuts — instead companies have cut costs and rationalized businesses. In other words, these companies have recognized the great economic shift that has just occurred and used the recession as an opportunity to position themselves well to take advantage of the new economy that has emerged from the ruins. In effect, recession was taken as a huge business rationalising exercise.
Corporates and bourses are likely to get bolstered by the fact that business and consumer confidence across the world is at a high, signalling a return to the earn-and-spend culture. On a BRIC nations' basis, a KPMG Business Outlook survey indicates that Brazil, Russia, China and India are showing a strong rebound in sentiment, with the former three being quite cheerful, while India is showing the least amount of positive attitude among the four, with 22.5 per cent of manufacturers here saying they expect a rise in business activity. The perception was entirely negative in January 2009, though.
According to a survey on consumer confidence in India by Nielsen Global, as many as 66 per cent of Indians are optimistic that India will get completely out of the recession within the next 12 months. Globally, the survey indicates that consumer confidence has risen by 5 points to 82 from March standings.
NATURE OF RECOVERY
As is clear from the above and what is to follow, we are emerging gradually from the slowdown. But, exactly what shape the recovery is going to take, a 'U', a 'V' or a 'W' depends entirely on what kind of effect government spending, domestic demand and global cues will have on the Indian and global economy. Nobel Prize winning economist Paul Krugman is looking at a 'W' shaped recovery, which means there is downswing coming. Taking a stand against recession coming to an early end is Nouriel Roubini. He has said that the recovery would be 'U' shaped, that is long and deep.
For the moment though, India is seeing a 'V' shaped recovery, courtesy the manufacturing output numbers jumping vertically. Stock market indices record the same shaped recovery.
THE INDIA STORY
There is no denying the fact that India and the world are facing many predicaments that can lead the economy back into a downward spiral. We take a look at the India-specific factors.
The drought is a reality, here and now in India. Some 246 districts out of more than 600 have been declared as drought-affected (all-India rainfal scarcity: 29%). Speculation is rife that farm growth is going to fall from a plus-2 per cent growth rate to negative growth of 2 per cent. The lower farm growth that is going to result is going to impact the economy.
For the man on the street, the effect of the deficient monsoon is already being felt. Spot market prices for most food items have jumped, with sugar up by 25 per cent, tur and urad by over 30 per cent, and masur dal by 20 per cent. Even wheat and rice prices have registered double-digit growth.
Impact of the drought, however, is being downplayed by authorities. The argument is that kharif crop acreage under threat is comparatively small and if you add to the equation that agriculture is falling in the overall makeup of the economy, then the whole emergency becomes controllable. Analysts are of the opinion that the effect of drought on GDP will be about 1 per cent. They argue that economic growth, as such, has been separated from agriculture.
Corporates doing well translates into humming stock markets. The main driver of markets globally is the positive sentiment, but since the signs of recovery are still in the nascent stage, people are worried about going the whole hog. Perhaps, they should align that with the Chicago Board Options Exchange Volatility Index (VIX) (measures volatility in the US S&P's 500 stock index), which has fallen from a high of 50 as on March 9, 2009 to 25 as on August 6, indicating a better environment for enterprises, says Bloomberg.
Markets in India have been hovering around current levels for the past 2 months without any signs of breaking from the trend, indicating that all threats/fears are gradually being factored into the valuations. So, while the bulls have raced towards gains, from March to June end, since then their grip on the markets have been counterbalanced by the bears.
Sentiment may also be hurt by valuations being stretched. Nifty is trading around 20 times earnings-per-share over the last four trailing quarters. Its 10-year average (median) valuations are around 16-17 times last year's earnings. Compare that to the price-to-earnings multiple of 22 at the height of the boom in February 2007. Sensex is trading at a PE of around 20, which is still lower than the height-of-boom PE multiple of 25 in December 2007, when the index was trading at over 20,000 points. However, rising corporate earnings over the recent quarters should not stretch the valuations beyond tolerable limits.
Aligning drought threats with Sensex is complicated but, it may well have caused food stocks like Ruchi Soya to rise by over 83 per cent, while Tata Coffee is up by 80 per cent, and Agro Tech Foods is up by 50 per cent, while sugar stocks are in a league all their own. In fact almost all food stocks are up by a large margin.
Looking at Sensex history, it has been seen that the index falls or remains range-bound due to uncertainty over the monsoon in the period between June end to September, yet once the ground-reality is understood better by market players, Sensex invariably rises in the post-monsoon period. During the rain-deficient period in 2001, Sensex fell by over 18 per cent between July-Sept, but it recovered everything by gaining by as much as 16 per cent in October-December; in 2002, Sensex fell by almost 8 per cent, but gained 13 per cent in post-monsoon period; but in 2004, Sensex actually gained over 16 per cent in a rain deficient period, while it gained another 18 per cent in the latter period, which is quite an unexplained anomaly.
Therefore, over the next few weeks, markets will be reacting in a short-term manner to two big cues: drought and the global economic performances. By then the new quarterly performances would start providing a fresh source of news to factor in any stock market moves.
In the current upbeat-but-cautious times, investors must adhere to basic principles of investing and they will then most probably find that the recession has paved the way for a huge number of opportunities to make money. This is not to say the markets will rise tomorrow or for the next month, it is just figuring objectively about gains made by investors who invest in a systematic manner. Irrespective of whether there is recession and worse, money-making opportunities are present for every investor who uses his funds in a rational manner and does not let irrational market moves either paralyse him or push him beyond his capacity.
There is a via media. If an investor, who had invested through a systematic investment plan (SIP) in equities for a decade, had his investments analysed, it will show where the path to tangible returns lies. Assuming that he invested Rs 10,000 a month in an equity fund that tracked Sensex, today, his investment would be worth over Rs 25 lakh. This is despite the crash of 2000. However, if that particular millennium bubble had not occurred, then what would have happened? The recovery happened in a protracted manner, but by January 2004, the old Sensex mark was surpassed. In a hypothetical situation, in which Sensex remained flat at 6,100 points from February 2000 to January 2004, the investment would have been worth just Rs 20 lakh today! The crash of 2000 was responsible for the extra 25 per cent.
For the investor, the takeaway is that he should be aware that the markets are up almost 100 per cent from the lows that they plumbed, but that kind of pace is unlikely to be sustained, even though there are some that have laid their reputation on the line, like Credit Suisse Group AG, which says it sees Sensex at 17,000 points.
The recession has cleared some cobwebs globally from the collective minds of the investors. One of the major lessons is that market prices don’t inculcate, or factor in, all the data and impacting agents that are part of the entire dynamics, so in effect, stocks behave quite irrationally, at times.
For India, the recession has been a positive in the fact that its policies of thrift and balancing of trade are the way to go. But most of all the lesson to be drawn from the vagaries of the recession is that markets may fall, but they don't fail, inevitably they turn around and savvy/systematically inclined investors recover their losses and add to their gains. It is nothing else, but yet another affirmation of maintaining discipline.
The article has appeared in the September issue of Wealth Insight magazine.
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