It’s now a few months since I wrote my thoughts about the markets and now I am being asked by a few of the readers whether we have now reached the bottom. As I said earlier, the beauty of a bear market is that bad news comes out of the blue just when you start thinking the worst is over. Who expected a virtual collapse of the financial systems in US and Europe? The problem is whom do you trust – because no one will tell you the truth. We will be too naïve if we expect the Finance Ministers and Central Banks to tell us that there are problems and things can go bad. Analysts? Most of the guys who come on TV are telling you one thing and probably doing another.So what should one do now? While the indices have lost 50%, stocks have eroded by 80-90%. What should we do now – buy, hold or sell?
Cracks appearing in the Indian financial system ….
The drying up of liquidity in the Indian financial system is more out of fear than real problems with the banking system. Of course, during the economic boom over the last five years, banks and financial institutions would have made bad lending and investment decisions. And bad financial decisions show up over time, not immediately. And the deterioration accelerates when the economy cracks. US and Europe are clear examples of this. When growth is fed by asset bubbles, it is unsustainable and I think we are going to experience it going forward.
The urgency with which CRR has been cut by 2.5% and a liquidity package for mutual funds has been announced is a clear indication of things turning bad. I do not know if this is going to solve the problem, but I do know that the risk aversion is going to return in a big way and people will behave differently when that happens. And no amount of cajoling by the government and RBI will help.
The financial system and industry have got used to easy and cheap credit and have made big plans accordingly. Now equity and debt are going to be equally difficult to raise, creating financial problems all over the economy.
The drying up of liquidity in the Indian financial system is more out of fear than real problems with the banking system. Of course, during the economic boom over the last five years, banks and financial institutions would have made bad lending and investment decisions. And bad financial decisions show up over time, not immediately. And the deterioration accelerates when the economy cracks. US and Europe are clear examples of this. When growth is fed by asset bubbles, it is unsustainable and I think we are going to experience it going forward.
The urgency with which CRR has been cut by 2.5% and a liquidity package for mutual funds has been announced is a clear indication of things turning bad. I do not know if this is going to solve the problem, but I do know that the risk aversion is going to return in a big way and people will behave differently when that happens. And no amount of cajoling by the government and RBI will help.
The financial system and industry have got used to easy and cheap credit and have made big plans accordingly. Now equity and debt are going to be equally difficult to raise, creating financial problems all over the economy.
Working capital inadequacy likely to play havoc …
People in industry know what this means. Elongated receivables cycles, piling inventories, increasing risk of bad debts and most importantly the risk aversion of banks will take its toll on the growth of businesses and in some cases we are even going to see sharp decline in revenues and profits.
Falling commodity prices to create a deflationary environment …
After grappling with inflation (which was hurting the consumers), we are now likely to witness a deflationary environment that will negatively impact the topline and bottomlines of companies from price erosion. All companies that are in the commodities business will see declines in revenues because of shrinkage in volumes and decline in selling prices. The combined effect will be a steep decline in profitability. By commodity business I mean every business where the selling price is linked to its key raw materials.
Real estate bubble about to burst …
It’s been a while since people have been talking about it, but the prices have not really tanked yet. The builders, who managed to raise a lot of equity this time, were not desperate. But the funding options for real estate players are drying on all fronts. Equity is out. Loans from banks are out. And there is no easy foreign money available. They will now have to again depend on private financing, which generally comes at 24%+ per annum. Some of them are reported to have borrowed at such levels.
And where is demand going to come from? The software guys who led the end consumer demand at exorbitant prices are no longer preferred as there is uncertainty over their careers. Profits from stock markets which create demand at the peak of a bull market has vanished. Demand from real estate players who are flush with funds from earlier sales of property is down to trickle.
So we have a perfect scenario for our own meltdown in this market – exorbitant price levels, low demand, increasing supply and absence of easy credit. It’s about to happen any time now.
Cash is king…
The best thing to do is to hold on to your cash and not rush into making investment into stocks or any other asset class. Even gold will be vulnerable to declines as losses start mounting with declining asset prices. This is going to be a prolonged bear market and stocks will be available really cheap. I don’t know how people have forgotten that stocks were available at 3-4 PE multiples until 2003 and even large caps were available at 8-9 PE multiples. Are we anywhere close to those levels for some of the major ones yet – Reliance or L&T or NTPC? The answer is NO! So, given the overall economic environment, we may have a long way to go down before things turn around and confidence returns.
Vivek Bhargava
(For taking this discussion further please contact me at wealthbridgeindia@gmail.com)
DISCLAIMER:
The views and opinions expressed here are strictly mine. In addition, my thoughts and opinions change from time to time. I consider this a necessary consequence of having an open mind. I do not undertake responsibility to update all my thoughts and opinions on this page.
The information contained herein is from publicly available data or other sources believed to be reliable. I do not represent that the information contained herein is accurate or complete and it should not be relied upon as such. The user assumes the entire risk of any use made of this information.
Investors should obtain advice from their own tax, financial, legal, and other advisors and only make investment decisions on the basis of the investor’s own objectives, experience, and resources.
No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this page.
People in industry know what this means. Elongated receivables cycles, piling inventories, increasing risk of bad debts and most importantly the risk aversion of banks will take its toll on the growth of businesses and in some cases we are even going to see sharp decline in revenues and profits.
Falling commodity prices to create a deflationary environment …
After grappling with inflation (which was hurting the consumers), we are now likely to witness a deflationary environment that will negatively impact the topline and bottomlines of companies from price erosion. All companies that are in the commodities business will see declines in revenues because of shrinkage in volumes and decline in selling prices. The combined effect will be a steep decline in profitability. By commodity business I mean every business where the selling price is linked to its key raw materials.
Real estate bubble about to burst …
It’s been a while since people have been talking about it, but the prices have not really tanked yet. The builders, who managed to raise a lot of equity this time, were not desperate. But the funding options for real estate players are drying on all fronts. Equity is out. Loans from banks are out. And there is no easy foreign money available. They will now have to again depend on private financing, which generally comes at 24%+ per annum. Some of them are reported to have borrowed at such levels.
And where is demand going to come from? The software guys who led the end consumer demand at exorbitant prices are no longer preferred as there is uncertainty over their careers. Profits from stock markets which create demand at the peak of a bull market has vanished. Demand from real estate players who are flush with funds from earlier sales of property is down to trickle.
So we have a perfect scenario for our own meltdown in this market – exorbitant price levels, low demand, increasing supply and absence of easy credit. It’s about to happen any time now.
Cash is king…
The best thing to do is to hold on to your cash and not rush into making investment into stocks or any other asset class. Even gold will be vulnerable to declines as losses start mounting with declining asset prices. This is going to be a prolonged bear market and stocks will be available really cheap. I don’t know how people have forgotten that stocks were available at 3-4 PE multiples until 2003 and even large caps were available at 8-9 PE multiples. Are we anywhere close to those levels for some of the major ones yet – Reliance or L&T or NTPC? The answer is NO! So, given the overall economic environment, we may have a long way to go down before things turn around and confidence returns.
Vivek Bhargava
(For taking this discussion further please contact me at wealthbridgeindia@gmail.com)
DISCLAIMER:
The views and opinions expressed here are strictly mine. In addition, my thoughts and opinions change from time to time. I consider this a necessary consequence of having an open mind. I do not undertake responsibility to update all my thoughts and opinions on this page.
The information contained herein is from publicly available data or other sources believed to be reliable. I do not represent that the information contained herein is accurate or complete and it should not be relied upon as such. The user assumes the entire risk of any use made of this information.
Investors should obtain advice from their own tax, financial, legal, and other advisors and only make investment decisions on the basis of the investor’s own objectives, experience, and resources.
No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this page.
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