Global crisis to hit India economy more in 2009

The global downturn will pressurise the Indian economy more next year and the government has to speed up reforms and boost investment to 2008: Year of global financial crisis sustain high growth rates, a report said on Friday.

The report jointly prepared by World Economic Forum and Confederation of Indian Industry also said India could see a sharp outflow of capital, and a fall in share and asset prices due to the global financial crisis.

The report was released ahead of the annual India Economic Summit starting Nov. 16 in New Delhi, where top government officials are expected to interact with heads of global firms.

"India's dependence on capital flows to finance its current account deficit is a macroeconomic risk and the global crisis could generate a sharp increase in capital outflows and a reduction in the availability of finance," it said.

"Clearly, the global economic picture will be harsher next year and there will be greater pressures on Indian economy."

The global credit crisis has rattled Indian markets as foreign investors sold shares worth more than $12.5 billion so far this year while the rupee fell by more than 20 percent.
"It (global crisis) could also weaken the balance sheets of the financial institutions, cause a further fall in share and asset prices, and challenge the macroeconomic situation due to shrinking global growth," WEF said.

Indian policymakers expect a moderation in economic growth to less than 8 percent in the year to March 2009, compared with 9 percent recorded in 2007/08 fiscal year.

Earlier this month, Prime Minister Manmohan Singh cautioned that the global financial crisis could be more severe and prolonged, and the government would take all necessary steps -- monetary and fiscal -- to protect growth.

"A tighter environment may also help speed reforms and encourage greater efficiency," WEF said, adding a great deal of political will and dialogue with different stakeholders would be required to take reforms forward.

"...India's growth is still strong relative to other economies and its growth story will continue to be one that will unfold over decades rather than years," it added.

India should reduce rates further

India needs to cut interest rates further as two reductions in less than a month haven't been enough to make loans affordable for companies and consumers, Bimal Jalan a former central bank governor said.

Policy makers should lower benchmark rates further "if necessary" to enable banks to cut their loan rates, Bimal Jalan, the top official at the Reserve Bank of India from 1997 to 2003, said in an interview in New Delhi.

Measures taken by the central bank and the government in the past month have helped bring the crisis "under relative control."

The global financial crisis has led to a shortage of money in India's banking system, affecting lenders' ability to extend loans to companies and individuals.

That's eroding consumer demand and has prompted production cuts at companies including Ashok Leyland, the nation's second-biggest maker of commercial vehicles, and JSW Steel Ltd.

Demand for domestic loans increased after funds dried up overseas following the seizure in credit markets and the collapse of Lehman Brothers Holdings Inc. on September 15. State Bank of India, the country's largest, cut the rate it charges its best clients to 13 per cent last week from 13.75 per cent, the highest in a decade. ICICI Bank Ltd., the second biggest, hasn't reduced its 17.25 percent charge.

"We need to create conditions so that loans are available at interest rates at pre-crisis levels, as other sources of finances have dried up," said Jalan, 67. "I am in favour of further reducing the cash-reserve ratio and the repurchase rate, if necessary."

Slower growth
India's $1.2 trillion (Dh4.4 trillion) economy may expand at the slowest pace in four years, the central bank estimates, as the credit crisis tips the world's industrialised nations into a recession.

Larsen & Toubro Ltd., the country's biggest engineering firm, said its borrowing costs will climb in the next six months and DLF Ltd., India's largest developer, last week said its hotel venture with Hilton Hotels Corp. may be delayed by up to 18 months as it tries to secure funds.

The benchmark Bombay Stock Exchange Sensitive Index has declined almost 50 per cent this year on concern slowing demand will hurt companies' profits.

India's central bank cut its benchmark repurchase rate by 1.5 percentage points in two stages starting October 20 to 7.5 per cent from a seven-year high of 9 per cent. It also lowered the amount lenders must set aside as reserves to cover deposits by 3.5 percentage points in a month, freeing up as much as $29.5 billion in cash to ease lending.

"The action taken by the Reserve Bank seems to be absolutely appropriate," Jalan said.

Right time to invest in stocks

The recent carnage in the stock market has seen major indices losing more than half their peak values. By the first week of November ’08, the Sensex had fallen by 52.3% from its peak of 21,206.8 in early January ’08. The Nifty lost nearly 53% during the same period. While investors are concerned about the future performance of the stock market, they appear to be less familiar about an interesting fact. The market crash has resulted in stock prices falling below the book value of companies in most cases.

Book value represents the value of a company’s assets net of its liabilities. In other words, it tells what you will be left with, if the company were to shut down, its assets sold and liabilities paid off.

So, logically, a company that is a viable profit-making business will always be worth more than its book value due to its ability to generate earnings and growth. Hence, shares trading below their book value are a sure sign of gross under-valuation and indicate low risk for investors.

An analysis of BSE 500 stocks reveals that one out of every three stocks is currently trading below its book value. A sample of 479 companies with latest book value information was selected for the study from the 500 companies that comprise the BSE 500 index. The stock prices of these companies were then divided by their respective book values to arrive at the price-book value ratio (P/BV).

According to the study, as many as 170 companies reported stock prices lower than their book values. Interestingly, on January 21, ’08, the day when the market temporarily halted trading due to massive losses, only 26 companies out of the sample set were trading below their book values.

The study also revealed that as on November 3, ’08, nine out of 10 companies were trading at P/BV multiples which were lower than their value on January 21, ’08. Real estate companies dominated the list of companies that saw erosion in their book values during the said period. Among the top 10 such companies, five were from the realty sector.

There are two reasons for this erosion in P/BV. Not only have stock prices of companies fallen sharply, but in many cases, the book value has also increased. Every four out of five companies reported a jump in book value between January ’08 (BV in FY07) and November ’08 (BV in FY08). Investors can use the information on P/BV multiple as one of the decisive indicators while taking investment decisions in a falling market.

A P/BV multiple of less than one reflects lower risk for investors in case the company faces bankruptcy. Further, talking about stock recommendations by ETIG, some stocks have seen a considerable decline in their current P/BV compared to that on January 21, ’08.

Aban Offshore, Allied Digital Services, Bank of India, Adhunik Metaliks and Jain Irrigation are some of our recommendations that have seen a drop in their P/BV multiples, which are now between one and three. Moreover, India Glycols and Ratnamani Metals & Tubes are currently trading at P/BV of less than one.

Political aspirations of Indian diaspora rise with Obama win

Democrat Barack Obama's election as the first African American president of the US has ignited hope among Americans of Indian origin who dream of either pursuing political careers or having members of the diaspora represent them in the political arena.

"The election of Obama is encouragement for any American Indian. It shows us that anything is possible. I hope it motivates American Indians to run for elected offices. In fact, it has encouraged me to think of running again," American entrepreneur of Indian origin Chiranjeev Singh Kathuria told IANS on telephone from Chicago.

A physician from Brown's University (Rhode Island) and MBA from Stanford (California), Kathuria made an unsuccessful bid to be a Republican candidate against Obama from Illinois. However, he hailed Obama's victory as "path breaking for second generation immigrants".

"I hope in my old age, before I die, I get to see an Indian American elected as president. It was very enriching, exciting and, at times, a trying experience to run for the US senate. It will be an experience I will always remember," said Kathuria.

Rajwant Singh, national president of the Sikh Council on Religion and Education (SCORE), said: "Obama's election represents dynamic America at ease with its diversity.

"We Sikhs are proud of this nation, and this election brings new hope to 500,000 Sikhs who have been here for the last 100 years. This victory will certainly inspire many Sikh Americans to aspire for the highest office in this country and will not deter them due to their appearance," he added.

While Obama's victory has given a boost to the political aspirations of many immigrants, for minority communities such as the Sikhs, who have been victims of hate crimes post 9/11 because some Americans have mistaken them for Arab Muslims, the victory is a definite sign of change.

Jasbir Singh Kang of the Punjabi American Heritage Society from Yuba City said: "This is a historic day for all Americans. A son of an immigrant has become president-elect. This can only happen in a great country like America.

"This is a great cultural and a historical shift in American politics, and we Sikhs look forward to working with President Obama," said Satinder Singh Rekhi, CEO of a company in California's Sacramento city and chairman of SCORE's board.

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Stock Market Turbulence - A model to follow

We live in extraordinary times. After leveraging till January 2008 and averaging till October, market participants are still gauging what hit them hard. Former Fed chief Alan Greenspan, who authored the bestseller An Age Of Turbulence, is now accused of causing much of theturbulence by keeping interest rates too low for too long and failing to check the explosive growth of risky mortgage lending. He admits he was ‘partially’ wrong in opposing the regulation of derivatives.

After years of unmonitored growth, the world is finally having to pay for the huge pile up in leverage, its casual attitude towards risk management, asset froths due to cross-border carry trade flows and step up in weapons of mass destruction (read derivatives). In a matter of months, the world has gone from a state of profound optimism to that of deep pessimism. The outbreak of US Subprime crisis in August 2007 has had a cascading effect on the world economy. Carry trade, the main liquidity driver, continues to unwind and a global flight of capital is taking place. Risk aversion has reached historic levels and even while central banks are cutting rates, financial institutions are unwilling to lend, resulting in capital turning insufficient and costly.

After nearly five years of unprecedented rise, the Indian stock market hit a roadblock in January 2008 and the Nifty’s then high of 6,350 has vanished from public memory. The tsunami of relentless selling has taken its toll on commerce. The cracks are now appearing in the profit cycle of companies. Volatility has risen sharply and it is fair to say that confidence is at an all time low. We are part of that world and theories like decoupling remain literature to be read at leisure.

History suggests that Indian bear markets last 3-4 years with up to 58% price corrections. In terms of price, we have already fallen below historical levels. Whether we will spend another 2-3 years from now in the bear zone is difficult to gauge at this point. The global economy is facing a recession and the extent of damage is such that healing could take a while. But having said that, unless one believes there is no tomorrow, economies will eventually find a way to resurface and markets will make the painful adjustment and move up again. On the brighter side, economic cycles are getting shorter.

Every dark cloud has a silver lining. There are positives to take away, even in bad times. During a slowdown, companies turn cost conscious and excesses are weeded out of the system. They get time to pause and take stock of their plans. A bear phase could often act as a healthy check and help cut down flab, which helps good companies emerge stronger. Another advantage of a bearish period is that it boosts a long term investor’s return by giving the opportunity to buy future winners at yesteryear prices. Even after the staggering fall since January 2008, Rs10 lakhs invested in Sensex companies in mid 2003 would have grown to approximately Rs30 lakhs today.

This simply re-emphasizes that equities have proved to be the best asset class in the long run.

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is.” – Warren Buffet

“For those properly prepared in advance, a bear market in stocks is not a calamity but an opportunity” – Sir John Templeton

Investors have in recent times paid the price for not being fearful when others were greedy. The reverse holds true now. The time has come to be greedy as others turn fearful. Investors with a 3-year horizon should see opportunity in these adverse times. That does not mean you rush to create wealth overnight. The best way to create wealth is to build a portfolio of fundamentally strong companies which will bounce back stronger in the years to come. When the dust settles and the world economy stabilizes, India will be among the first to race ahead. The best bargains are now available at the equity shopping mall. But deep discounts need not necessarily mean value for money in the long term.

Keeping in mind a 3-year horizon, we have built a model portfolio of 12 stocks with assigned weights. We believe IMP strikes the right mix as our chosen stocks are:

1) Companies that are adequately funded with low financial leverage and will therefore, not be severely affected by reversal in credit cycle

2) Businesses with reasonable earnings visibility even in this uncertain environment

3) Value buys that will be less damage prone to the high volatility in markets

4) Growth stories with an element of inelasticity in demand

The India story cannot be thought of without giving enough importance to rural themes. Rural India is not much susceptible to a slump in the stock market or property market. Three consecutive years of good monsoon, farm loan waiver and benefits accruing from the ‘Bharat Nirman’ and ‘Rural Employment Guarantee’ programs provide enough proof that demand will sustain even as the broader economy loses steam for some time. Some of these forma part of the IMP.

Attractive bargains often tempt people to spend more than they can afford. We advise you to resist such temptation and gradually add stocks to your portfolio. We are confident the IMP will strengthen your portfolio and outperform the benchmark (Sensex). Take your time to build a strong portfolio. After all, Rome wasn’t built in one day.

You won't get there by reading 'Now is the time to buy.’ – Peter Lynch

“Uncertainty actually is the friend of the buyer of long-term values” – Warren Buffet

A Model Portfolio of 12 stocks with assigned weights :-

1.Bharti Telecom 10.0 Market leader with high visibility; impressive return ratios

2. BHEL Capital Goods 5.0 4.2x Order backlog/Sales; well funded for executing capex plans

3. CESC Power 6.0 Capex on track; trading at 60% discount to peers

4. Cipla Pharma 4.0 Continues to outperform guidance; benefits from INR depreciation

5. Gail Oil and Gas 5.0 Increased gas supplies to drive core business of transmission

6. Hero Honda Auto 5.0 Gaining market share; riding on rural growth

7. Jindal Saw Pipes 5.0 High order book and margin improvement to drive earnings

8. M&M Auto 5.0 Rural play: Tractor and Bolero growth to remain strong; trading below BV

9. Marico FMCG 5.0 Highest growth among peers - trades at a discount; 25% sales from rural

10. Reliance Ind Oil and Gas 17.0 Commencement of KG-D6 and RPL growth drivers

11. Sun Pharma Pharma 4.0 Low risk business model in the industry; robust balance sheet

12. Tech Mahindra IT 7.0 High revenue visibility vis-a-vis peers; best play in IT