All that glitters is not gold !

Don’t get carried away by recovery, further downside ahead

recession Stock markets stage good recovery last week with BSE gaining nearly 5% and NSE gaining around 4 %. The recovery was backed by similar story in the global markets. However, Investment Guru is of the view that one should refrain from buying at current levels and should actually try to get out if one is getting good price or recovery in any stock. The global economic downtrend continues unabated and we are still in the mid of economic slowdown. The pull back rally should not be considered as a sign of recovery of economy. Let’s take a look at some indicators.

FII’’s continue to be Sellers


Looks like Foreign Institutional investors have forgot buying ! They have been net sellers to the tune of 53,000 Crore in Year 2008 and have already become net seller to the tune of 9,217 Crore in Year 2009. There has been a significant drop in the FII attraction towards the emerging markets more so due to higher redemptions faced by India Centric funds. Same has been the case with MF’s who have seen rise in redemption pressure and have been net sellers of 2,983 Crores in 2009 as against Net buyer of 11,728 Crores in 2008. With US economy already in Recession and European countries joining the list, the probability of FII’s Investment returning to India in big way is ruled out even at current levels. This is further going to put pressure on Indian markets who are looking for buying support ….but investors seem to be in mood to loose more and are waiting for dust to settle before they make a call.

India witnesses Slowdown in growth

The claims of 10% growth rate are a thing of past. Realistic targets are being talked about in view of global meltdown and the new estimates are somewhere between 4-6% of GDP growth for India. Though it has been though for the markets to digest these numbers after they became used to hear about 10% growth, Investment guru is of the view that even at these lower levels India would be second only to china in terms of growth rate. Look at china, these guys have virtually forgot to talk in terms of single digit after delivering double digit growth for years and are now set to post a single digit growth of 6-7%. Most of the developed economies are expected to post negative growth confirming their recessionary trends.

The slowdown in growth coupled with deflationary trend trends in economy would act as a deterrent to the sensex to move up sharply. There is a need to readjust our expectation in line with current growth estimates and I think the current levels of sensex are not extremely cheap. Corporate profits are bound to shrink resulting in shortfall in tax collection targets of government and reduced expenditure on infrastructure and public spend. The deflationary economy would create a situation of deferred consumption which may further detoriate the situation. There is a further downside left in markets and current rally would be just a eye wash.  These short spurts would keep coming and going due to short term demand –supply mismatch and market reactions to short term developments. Use them to adjust your portfolios.

Global Economy Updates

US is still in pretty bad shape. Looks like the giants have still not learnt the lesson, AIG is learnt to pay retention bonuses from the bailout package it received. The company was saved after a $170 billion bailout package by US Treasury. The recession gripping the U.S. deepened last month as factories and home builders scaled back even more. Bloomberg reports that industrial output fell by 1.3% in February. Former St. Louis Federal Reserve Bank President William Poole said the U.S. is “in a terrible situation,” led by officials who are unsure how to avert the rescue of financial companies and unwind current bailouts.

Morgan Stanley has said in its outlook that the S&P 500 Index may fall 25 percent in the next few months as earnings slump for a seventh quarter and the recession deepens. U.S. stocks are still expensive even after the S&P 500 dropped 52 percent in 17 months, according to a method used by Benjamin Graham, the father of value investing and mentor of Warren Buffett. He measured equities against a decade of profits to smooth out distortions, a method that shows the S&P 500 traded at 14.5 times earnings yesterday, according to data compiled by Yale University Professor Robert Shiller. At the bottom of the three worst recessions since 1929, the average ratio fell below 10. To reach that, the S&P 500 would have to sink more than 30 percent.

There is a interesting Global recession Status update on Moody’s website. You can see the chart here. It shows the whole of US, Canada, Russian Federation, Most of the European region, African region, part of Asia such as Singapore, Thailand and Japan already under recession and Countries such as India, Brazil,Argentina,Mexico, China, Middle East Asia, Australia and Pakistan under Risk of recession. 



Now thats a lot of reading.