So it is official. Atleast 4 of the major Economies are in recession - US, UK, Eurozone, Japan. Very soon, more will join this group. The urgency shown by the Governments and by Central Banks has shown little positive results so far.
I think the speed of this Tsunami has possibly left little time for Governments to think through. Eventhough rumbles in the nature of Bear Sterns and others hit the world before September, it seems that the post September 15 events (just about 2 months) were the watershed events-the letting go of Lehman must be rankling the Fed so badly. Until October the Fed has been grappling with the fallout of the Tsunami and as the US went through an election, it has been surprisingly inert, I mean on the fiscal side. Otherwise, what explains inaction on the Auto sector; the large employment is attraction enough for a politician to act.
The US also seems to have tied itself up with TARP. The freeing up of the Credit markets in itself can only push money market rates down across. Since markets expect the Fed to reach its zero rate (0.25%) what next? In the face of the phenomenal risk aversion and as more economies tumble down and demand is destroyed, why are Governments not taking fiscal steps?
The problem is that though the problem has built up over some years and has been assuming a shape and size in the last 15 months, the full force on the economy has been felt in the last few months. The size and the regularity of the problems have surprised Governments. Central Banks, with their clear heads (and objectives of growth, inflation, employment) have moved first, obviously with helpful prodding from Governments. But, what seems to be scarce is governmental action.
It would seem that Governments are so poorly prepared to deal with something like this, individually or collectively. But, if we were to step back and have a relook it is clear that every solution is itself quite complex. Since demand is yet to be fully destroyed, and employment has not really plummeted very severely, when recession is still at the shores of advanced nations, there has been such limited steps from developing nations. The developed nations themselves are unable to break free of their capitalism - they think the steps from Central Banks are adequate. The problem is of course, deeper. Developed countries have lived off the demand from developing countries. Since the latter are beginning to suffer GDP falls, developed nations will quickly discover that pushing the string will lead to nowhere. Until markets stay in a panic mode, funds flow into developing nations will suffer and consequently the vicious circle continues. It is my guess that the way out is going to take a few quarters.
Meanwhile, if you were to analyse the above, the following ideas must appeal -
a) the dollar is possibly close to a reversal
b) emerging market currencies would have to strengthen
c) export growth from emerging economies will have to suffer
d) fiscal health of all nations will worsen; but, as it happens usually, I suspect the developing economies will have to pay more for this
e) steeper yield curves will win respect
Showing posts with label Emerging markets. Show all posts
Showing posts with label Emerging markets. Show all posts
Sunday, November 16, 2008
Sunday, November 9, 2008
What may work and what has not been done yet.
A lot of importance is being paid to Monetary Policy in Emerging Markets. This seems misplaced as I will argue below.
Most emerging markets have seen destruction of export demand to a great extent. Their stock markets have sympathetically self-destructed aping the stock markets of G7 economies. Their currencies have weakened to account for the likely pressure on the balance of payments.
The monetary steps that has been unleashed addressed the demand for dollars from stock market investors who were withdrawing investments from the emerging markets. The policies provided liquidity that was sucked out as the economy produced goods but those goods were not purchased due to demand destruction. The intention was to provide liquidity to push the wheels and gears of production.
But, in the face of demand destruction, how does monetary expansion help? Yes, in the first stage it is necessary to smoothen the market action and help production to continue. But, where is the fiscal stimulus to boost demand?One can only hope that the Governments have been busy preparing for the second step silently and hopefully they will announce the steps. We need effective steps. In India, unfortunately, we have no sign of such steps.
Until these steps are announced, I am not certain that we will see a major recovery in the stock markets. For the long term, I would recommend taking exposures on stocks with good OPM, high Dividend yield (compared to historical trend of the stock or industry), low price to book value and low PEs. Of course, selecting the correct industry is a problem. The negative list would include Auto, Auto Ancilliaries, Cement, Metals, Real Estate, Media, Shipping etc. I dont have a yes list but I would use the above rules to pick my stocks in various sectors.
It is still a risky game - we dont know how many more skeletons are waiting to come out and we dont know whether the recession will last one or two years. It seems policy makers are talking about a recession that is 2 years long. Buyers beware!. Dont expect major returns and keep a large stop. Happy hunting!
Most emerging markets have seen destruction of export demand to a great extent. Their stock markets have sympathetically self-destructed aping the stock markets of G7 economies. Their currencies have weakened to account for the likely pressure on the balance of payments.
The monetary steps that has been unleashed addressed the demand for dollars from stock market investors who were withdrawing investments from the emerging markets. The policies provided liquidity that was sucked out as the economy produced goods but those goods were not purchased due to demand destruction. The intention was to provide liquidity to push the wheels and gears of production.
But, in the face of demand destruction, how does monetary expansion help? Yes, in the first stage it is necessary to smoothen the market action and help production to continue. But, where is the fiscal stimulus to boost demand?One can only hope that the Governments have been busy preparing for the second step silently and hopefully they will announce the steps. We need effective steps. In India, unfortunately, we have no sign of such steps.
Until these steps are announced, I am not certain that we will see a major recovery in the stock markets. For the long term, I would recommend taking exposures on stocks with good OPM, high Dividend yield (compared to historical trend of the stock or industry), low price to book value and low PEs. Of course, selecting the correct industry is a problem. The negative list would include Auto, Auto Ancilliaries, Cement, Metals, Real Estate, Media, Shipping etc. I dont have a yes list but I would use the above rules to pick my stocks in various sectors.
It is still a risky game - we dont know how many more skeletons are waiting to come out and we dont know whether the recession will last one or two years. It seems policy makers are talking about a recession that is 2 years long. Buyers beware!. Dont expect major returns and keep a large stop. Happy hunting!
Saturday, October 11, 2008
The increasing sense of urgency - can markets survive?
During the week ending 12 October major Central Banks gave coordinated rate cuts of half percentage each. In the process, the ECB, FED had to give up their previous stances on the interest rate cuts.
The markets however, noted the significance of the move with derison - they promptly plunged deeper into fresh depths. Markets seemed confused as they were caught up in a global vicious cycle of competitive crash in equity indices, each index outdoing the other in the race to the bottom. Emerging Markets have crumpled too in this carnage. India was down 14%, Bovespa was down 20%, Thailand was down 23%. The markets in the West kept up quite well - Major indices were down atleast 20% this week.
The hand-in-hand march of indices during the last one month debunks most effectively the story put out by everyone during the last two years that the BRIC economies offered an alternative arena for investments and operated independently on their own strengths. The decoupled markets theory was developed in the last 5-6 years and sold to an "unsuspecting" west. During the carnage in the equity markets the developing countries have realised the "perils" of the globalisation and to their dismay found that markets were not decoupled - there was just a lag.
Of course, the decoupling is true definitely atleast on one account - the credit crisis that has hit the developed markets has not landed on the shores of emerging economies. Half of this is possibly due to laziness of policy makers rather than an intelligent choice of action. Equally, it is true that the caution of Central Banks has not allowed the spawning and blooming of new products and the current crisis in the emerging economies.
The impact on the emerging economies is thus on account of the risk of evaporation of export markets, the withdrawal of liquidity from their markets and the resultant impact on their GDPs. These factors are enough to bring the equity markets down. Along with that countries with insufficient balance of payments strength are hit by currency weakness and tight liquidity (and tight rates). Their Central Banks are attempting to protect the economies from these sudden impacts.
Globally, markets need to get out of the panic mode now. The G7 action is directed at that - whether collectively or individually. The UK model of capitalisation of banks as well as offering funding (along with guaranteeing market funding) is likely to be adopted in one form or other by most countries. The US is already following in that direction.
The huge growth in volume of OTC and Exchange Traded contracts amongst financial market participants covering various products was much celebrated all these years as it created employment and wealth. The large volumes is itself a result of the growth of trade, commerce, international funds flow, commodity hedging, and debt and equity funding during the last few decades. Over the years the participants have also changed - there are now a lot of retail clients and wealth management clients. Much of the activity is possibly rightly described as speculative or leveraged. Given this change, The impact of this correction on savings and GDP is possibly underestimated at this stage.
With the stock markets hitting multi-year lows and PEs dropping to single digits after the 50% fall in global indices in the last one year (and the 20% drop this week) rationality may return soon. The new week will face the market's concerns on the settlement of Lehman Contracts, the state of Morgan Stanley and the lack of fresh steps from the G7. It would be interesting to see if the market will take comfort from the increasing frequency of action from Regulators and Governments. The action is clearly directed at staving off a collapse. The measures to fight the recession will come later if markets survive.
The setting in of a recession in developed markets has been accepted more or less. But equity markets cannot give up 20% every week. This parabolic action is mostly likely signifying the bottom is now within sight.
Therefore, I would say - Hang on! We are almost there!
The markets however, noted the significance of the move with derison - they promptly plunged deeper into fresh depths. Markets seemed confused as they were caught up in a global vicious cycle of competitive crash in equity indices, each index outdoing the other in the race to the bottom. Emerging Markets have crumpled too in this carnage. India was down 14%, Bovespa was down 20%, Thailand was down 23%. The markets in the West kept up quite well - Major indices were down atleast 20% this week.
The hand-in-hand march of indices during the last one month debunks most effectively the story put out by everyone during the last two years that the BRIC economies offered an alternative arena for investments and operated independently on their own strengths. The decoupled markets theory was developed in the last 5-6 years and sold to an "unsuspecting" west. During the carnage in the equity markets the developing countries have realised the "perils" of the globalisation and to their dismay found that markets were not decoupled - there was just a lag.
Of course, the decoupling is true definitely atleast on one account - the credit crisis that has hit the developed markets has not landed on the shores of emerging economies. Half of this is possibly due to laziness of policy makers rather than an intelligent choice of action. Equally, it is true that the caution of Central Banks has not allowed the spawning and blooming of new products and the current crisis in the emerging economies.
The impact on the emerging economies is thus on account of the risk of evaporation of export markets, the withdrawal of liquidity from their markets and the resultant impact on their GDPs. These factors are enough to bring the equity markets down. Along with that countries with insufficient balance of payments strength are hit by currency weakness and tight liquidity (and tight rates). Their Central Banks are attempting to protect the economies from these sudden impacts.
Globally, markets need to get out of the panic mode now. The G7 action is directed at that - whether collectively or individually. The UK model of capitalisation of banks as well as offering funding (along with guaranteeing market funding) is likely to be adopted in one form or other by most countries. The US is already following in that direction.
The huge growth in volume of OTC and Exchange Traded contracts amongst financial market participants covering various products was much celebrated all these years as it created employment and wealth. The large volumes is itself a result of the growth of trade, commerce, international funds flow, commodity hedging, and debt and equity funding during the last few decades. Over the years the participants have also changed - there are now a lot of retail clients and wealth management clients. Much of the activity is possibly rightly described as speculative or leveraged. Given this change, The impact of this correction on savings and GDP is possibly underestimated at this stage.
With the stock markets hitting multi-year lows and PEs dropping to single digits after the 50% fall in global indices in the last one year (and the 20% drop this week) rationality may return soon. The new week will face the market's concerns on the settlement of Lehman Contracts, the state of Morgan Stanley and the lack of fresh steps from the G7. It would be interesting to see if the market will take comfort from the increasing frequency of action from Regulators and Governments. The action is clearly directed at staving off a collapse. The measures to fight the recession will come later if markets survive.
The setting in of a recession in developed markets has been accepted more or less. But equity markets cannot give up 20% every week. This parabolic action is mostly likely signifying the bottom is now within sight.
Therefore, I would say - Hang on! We are almost there!
Subscribe to:
Posts (Atom)
