Sunday, June 8, 2008

Crash at Dow Jones

The fall in Dow Jones by about 400 points and the rise in petrol by nearly $11 a barrel wasn't reported by the mainstream Indian newspapers. It should have been because this really exacerbates fears of a global recession. There are clear possibilities, and as George Soros has said, that oil is caught in a speculative bubble. But even these possibilities may not be enough and there seems no end to high oil prices for the time being. And there seems a clear link to stock markets. We should now look at what the Fed is going to do. Ben Bernanke doesn't have a lot of choices. He has already indicated that he wouldn't like to introduce further interest rate cuts and he may not have much space to do so without stoking serious inflationary fears in the United States. Already, people have begun to feel the heat of rising prices, rising gasoline, lower salaries and job cuts in the US. Any further mismanagement on the inflation front is likely to create further problems. The economy is a big issue this year and it remains to be seen how Obama would tackle it once he becomes the President of the US. If McCain beats Obama, which seems highly unlikely now, then we can expect a third Bush term and we can certainly expect further economic downturn.

Anyway, today is early morning on Sunday here in New Delhi, precisely 3.45 am, and when the markets open on Monday in India, we are going to witness a crash. The Nikkei , which opens earlier as it is in Tokyo, would provide clues to the kind of crash that we could witness on Monday morning. And there is a very strong chance that the Indian markets would be very volatile that day. If the Indian Finance Minister does something to soothe them, then we could see a rally later in the day. Such markets are the best time to stay away for short term traders but the best time to invest for long term investors.

Now, it is clear that the automobile and real estate sectors are headed for a beating in the short run. Automobile stocks, including Tata Motors, would be down because of high fuel prices and perceived low demand. I said perceived because in India, you can not have low demand for cars because of rising fuel prices. Indians are quite rich. And the real estate sector, which has been a driver of the economy, is expected to take a beating because of perceived sluggishness of the economy as also the fact that the investments of the non-resident Indians is likely to dry up. This is also a perceived fact not really something that is bound to happen. It isn't as simple as it looks.

Let me explain how it works.

For example, we stay in this flat in a good locality in South Delhi. It costs about Rs. 5 million to buy. If a NRI had bought it three years ago [and the prices were cheap then but let us assume the prices were the same], the person would have paid $100,000 as the US$-Indian Re. exchange rate was $1=Rs. 49. But if the person buys the same property today, he would pay $125,000 because the exchange rate is $1=Rs. 40. So, if the Indian Rupee rises against the US$ it makes it unattractive for the NRI buyer to invest in property here.

All this is fine but there is something else to it. In the last three years, there has been a bloodbath on the US property markets. Everybody has lost money and they have lost mind boggling amounts due to the subprime crisis there. In the last one year, property prices have come down by 15% or so in the United States. But in India, the prices aren't really coming down. We have had a 10-15% correction in few areas in the capital. There are areas in the country which are still witnessing heady growth in the sector. So, what do you expect the NRI investor to do? He knows that the US$ is falling, so, the property investments in India are getting costlier but he also knows that the Indian property market is still hot and he knows that the US property market are in a slump in a big way. So, there's still scope for the NRI to invest here.

This makes me argue my case for buying into select automobile and property stocks in a strong manner.

There's a footnote to this little post. There are fears that recessionary conditions in the US are going to affect the Indian technology stocks. Analysts who say that forget couple of things. The first is that companies like Infosys and TCS are global operations and don't focus solely on the US and even if they do, there isn't a lot of cause for worry. We know that businesses are going through a very rough patch in the US but that is precisely what will drive them to cut costs and to save money. And off-shoring and BPO is all about cutting costs. There is yet another economic logic which escapes most people. When businesses do badly, they have a sore need to expand operations, if they have some money to do so. So, unless, they are completely bankrupt, they would try their best to expand. And when American businesses expand, they look East. So, I don't think we are in for bad times. The only thing is that we are in for high volatility at the stock markets. This requires caution and patience. And careful planning.

I hope you folks enjoyed this piece of economic advice.

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