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28 February 2009


Its been a while since I last wrote a post. Plenty of reasons can be assigned to the non-event. From being lazy, busy and suffering from writer's block to being unable to fathom the next frontier. However the reason that I was unable to contribute online was singular - an unconscious decision, not to be the bearer of bad news. I do dread the 'shoot the messenger' syndrome.

A cynic had once remarked - those who cannot make it in the real world hide in the academic one or words to that effect. With investment decisions sinking under the tidal wave of a global meltdown it called for serious introspection. Of all the investments made, the only one that seemed to work was the hedge (see 'Hedge is Not a Four Letter Word'). One was even tempted to remove the underlying security and maintain the 'hedge'. Of course that would be speculation. However with speculators now ranking somewhere above serial killers and below arsonists in social acceptability, one passed over that idea and retreated to the world of books, basics and the banality of TV reports. The result of the introspection - that per se there are pickings to be made in the current market but the present and immediate future does not a rosy picture paint.

 My intellectual 'guru' sums up my studies of the past three months in one line.

"The best thing about the future is that it is not here yet" - Dilbert

The last quarter contraction in the US economy was the worst since 1982 - a decline by 6.2%. The next doesn't seem to be too bright either, what with unemployment at 7.6%, closing in on the 80s rate of above 10 %, fall in housing prices by 27% and an annual GDP (de)-growth of -1.2%.

India too grew at its slowest since 6 years; 5.3 % compared to 8.9 % same qtr last year. The mandarins of North Block had given a growth estimate of 7.1% for the economy in January. This was preceded by 7.5% (given by Montek Singh at India Economic Summit held on 18 Nov 08). Now PC the FinMin, wearing the cloak of HomMin, on 06 Mar 08 says 7.1 % is a tall order.  C'mon make up your mind. Or atleast give us an honest estimate. 

Agriculture which accounts for 17.1% of the GDP shrank by 2.2%. Manufacturing which has a 14.8% share of GDP shrank by .2%.  So if a third of the economy is going to contract at this rate, how fast do services and others got to run to achieve it? 11.8%, for the arithmetically challenged! That's a tall order by any standard, especially so in the current global economic environment. 

So whats the prescription given by the pundits? An economy impetus programme with a lot of good money thrown after ill-conceived and poorly executed projects with no hope of taking off in the immediate future(six months), allocations notwithstanding. A rate cut trailing the fall in inflation, designed to boost borrowing, against the backdrop of almost 10% fiscal deficit. An excise and taxation rate cut envisaged to give succour to the beleaguered business world but looking more like an election sop.

Whats the prognosis? For the near term - I am tempted to sell. For the medium and long term the feast is mouth watering. 

What should be the preferred pick? I would go for Power, financials especially insurance, commodities especially oil, auto, telecom and retail. And in that order. The reasons in brief are given below.

Out of the six core industries(crude oil, refining, power, coal, steel, cement), only power and oil have a direct, visible impact on the population. Refining is intertwined with the world economy and suffers from excess capacity and falling demand. Cement has had a run up and its fortunes are linked with the real estate and infrastructure sectors. Steel is a global story while coal offers very little investment opportunity(largely restricted to the ancillary industries like explosives).

Financials are a no-brainer. With a reasonably well capitalised banking system and a sound asset base(though likely to be tarnished some bit in the future), the indian banking system is well secured and does not suffer the malaise inflicting its western counterparts.

Auto, telecom and retail reflect the relative insulation of the domestic economy and its consumptive growth story. 


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