Global Depression : Observations

- by Sankar Mukhopadhyaya

Global Pain Persists
• Lehman Bros. proved to be the latest casualty in the aftermath of the ongoing crisis that engulfed the global financial market. The bank filed for the bankruptcy proceedings under chapter 11 after it was unable to find a buyer - as Barclays Bank and Bank of America walked away from the takeover negotiations. This came in wake of the Fed refusal to take guarantee of the troubled real-estate assets on Lehman's balance sheet.
• Lehman was forced to seek capital assistance after it posted a loss of US$ 3.93 bn in the third quarter (10th Sept 08). The global market sentiments received further jolt – when; in short sequence - the takeover news of Merrill lynch by Bank of America was reported for a consideration of around S$ 50 bn.
• These series of events came a bit too close for comfort after the market just had a narrow escape from the previous developments; when Fed took over Fannie Mae and Freddie Mac. (Announcing conservatorship for both the GSE's in early Sept. )
• Added to that, the additional pain expected by the market experts in the coming few weeks from certain financial institutions and insurance houses' provided ominous signs for financial markets.
• The pain emanating from the subprime sector is increasingly hinting at infiltrating into other sectors. The manufacturing jobs in US have witnessed a decline. And the overall industrial output too is indicating a downward trend. With the US constituting a nearly 1/4th of the global GDP, the possibility a moderation in global economic growth seems likely.
• Given this backdrop, and the resultant sentimental fallout, it was natural that the emerging markets (including India) would react to the developments in US.
• Sensex posted a net decline of -3.35%, declining by 469 point, closing at 13531 points. Nifty closed at 4072 points, posting a decline of -3.68%. The damp market sentiment was further accentuated by the nearly US$ 212 mn pull out by FIIs from the Indian equities market.(possibly on currency risk fears) Domestic Cushion: India on its own trip
• The Indian economy, though bracing with its own internal issues, comes across as a mountain of stability in comparison to unfolding saga elsewhere. The growth of the Indian economy (not dismissing the umbilical cord of liquidity that connects the Indian markets to global bourses) would largely be determined by interplay of domestic factors.
• Of these, high inflation remains a major obstacle to growth in the Indian economic context. The political sensitivity towards inflation made it obligatory for the central banker to trade-off growth in favor of curbing inflation.
• The original reason for high inflation in India can at present be attributed to the fact that India remains a net consumer of commodities including crude oil. And therefore, has been affected by bull-run in prices of commodities abroad.
• However, the indication of a demand destruction in major commodity consuming economies, and a reinvigorated dollar has helped in unwinding significant gains made in commodities market. For instance, the international price of crude itself has declined by nearly 33% in the past few months and is currently trading at US$ 96 per barrel.
• This developing scenario provides ample head room for future growth. And would significantly assist in lowering the input cost of various infrastructure projects.
• The central government too has made an implicit argument for expanding the depth of the domestic financial market. The preliminary forays for policy reforms in Insurance, Banking, and Pension funds sector is an indication of towards that intent.
• Given this backdrop, the current market levels present a valuation of 13.79 times and 11.99 times respectively for the remaining quarter of FY09 & FY10 respectively. The earning opportunities for a large segment of Indian corporate sector remains largely untainted due to the near insulation of the domestic economy from the global slowdown.
• However, in the near term, the markets remain significantly susceptible to cues from global environment. An investor is therefore advised to hedge the risk across a larger time span using SIP facility. More-so, an optimal asset allocation strategy that, commensurates the risk-reward profile of an investor would be most prudent in the current scenario.