ValuePickr Forum

Gameplan: Are we facing a 2008 like Crisis again?

It would seem like the bad old days of 2008 are back upon us!

August 4 & 5 saw global markets collapse. Early part of this week seems to continue the trend. Dow and Nikkei have been seeing 4% plus falls!

We have had some weeks with a continuous flow of bad news - globally and domestically. The noise emanating from the Investment media with doomsday headlines are not making it any easier - not getting influenced, that is. Most of the “noise” however matters to short-term traders. If the FIIs are going to pull out money from our markets for a month or two, or resort to shorting the Indices, these are the guys affected. Not, long-term Investors!

Most of us long-term investors survived the 2008 debacle without major pains, and many with spectacular turnaround gains within less than a year of stoicism! Unless you had PANICKED! Those who panicked, lost out as they stayed away completely from the markets.

We need to focus on the “ABSOLUTES”. India growth story has been impacted, but is still growing at 7-8%, much better than the rest of the world. There are plenty of GROWING BUSINESSES with low debt and strong cash flows that will generate wealth. As long term investors our job is to take ADVANTAGE of market situations like this. Purge the portfolio of non-performers and high-debt candidates, take a strong look at performers, and keep accumulating our favourites, at every significant fall. Yes, your Portfolio must have CASH to be able to take advantage. But that’s another topic, covered under our Capital Allocation Framework thread.

What we faced in 2008 was a crisis. This time it is NOT a crisis. It is more like a “Permanent Condition”, as one senior investor astutely put it to me. I tend to agree with him that there is no magic prescription by which the US and the EU economies will quickly revert to healthier states. Domestically also, it is not realistic to see growth without high inflation! The world will have to learn to adjust to the new realities. New EQUATIONS will emerge. How long will this take and how much pain this may inflict on currencies and markets worldwide, is a moot question?

We as long-term investors will be better-off realising and adjusting to this truth, Asap. Meanwhile, let us NOT LOSE TRACK of healthy, performing and growing businesses!

Yes, present one is similar or I’d say much bigger than 2008. In 2008 only corporates were insolvent. Now Countries were bound to become insolvent.

You were talking about Indian Growth at 8%. With inflation @ more than 8% what is the real meaning for this growth. We’ve been seeing results by companies. Almost all the results are short of expectations and these folks have been giving meaning for these bullshit results.

India is immune to Global crisis and people are over estimating Indian Growth story.

RIP!

Would anyone like to post a list of attractive long term buys with recommended levels so that readers can capture opportunities to buy great stock on dips in next few days?

Thanks

It is too early to come to a conclusion. Short term traders may exit but long term investors should wait for 3 to 5 trading sessions. If things do not stabilise then we may start exiting. In my opinion, Nifty has a strong support around 5000. If it is broken with large volume, We have to exit.

Based on the US jobs report on Friday, the US added 115,000 jobs in July. The jobs report on May and June were alo revised upwards by 56,000 jobs. Back in 2008, legendary Warren Buffett himself quipped “The economy has fallen of a cliff”. Clearly, the situation is not as bad as in 2008. Jobs are still being created but at a significantly lower pace than market expectations.

The US & the Euro will grow at extremely slow rates. This is no crisis. The markets had anticipated strong growth rates and have now reverted to reflect the reality. I do not anticipate a recession but surely a long and painful path to recover for Western nations.

This reality check is good for the Indian economy as a whole as commodity prices like oil are now back to $85 in the US and $100 (WTI Brent). This should ease inflation concerns in India.

Export focussed industries could see a pull back. But I do not see any concerns for domestic industries - especially consumption focussed. India’s growth story is not intact but long-term investors should not be bothered if growth is 7% this year or 8%.

As Charlie Munger put it, sometimes the tide is with you and sometimes against. Just put your money into companies with a good moat, competitive, ethical management and you should do just fine.

Lastly, do not try to time the markets. Timing the market is not a consistent way of making money. Identifying the lowest point is also a fool’s game.

cheers,

Subbu

Hi Rishit,

Try and build conviction in stocks like Astral Poly Technik, Ajanta Pharma, Mayur Uniquoters, PI Industries. Nobody can transfer their conviction on to you, nor should you follow anyone’s lists or recommendations blindly.

Please do your own homework. I like the fact that a site like Valuepickr equips us to do just that. analysis templates, stock stories, and there is a wealth of information and discussion on many promising stocks. Try and identify the very best, and stick to them.

Hi Guruprasad,

The GDP growth rate of 8% is after adjusting for inflation, i.e. it is net of inflation.

Regards.

Rajat

Fundamentally, we are not even close to the problems that were there in 2008. Credit markets froze then. Now, nothing of the sort is happening. S&P is basically getting back at the political top brass in the US. These were the people who lambasted them for not providing enough warning before the housing crisis and S&P, Moody’s and Fitch got the wrong end of the stick back then. Now is their time to hit back. Revenge, as Dan Ariely argues in his latest book, is a very powerful motivation.

Funds and Institutionswill probably not stop buying US bonds because a “A” was replaced by a “+” in somebody’s report!! More because there is no credible alternative. Euro is in worse state, and Japanese Yen is not even in the running anymore. In this turmoil, Gold & Silver might shoot up along with the clamour for a gold-backed currency.

If we keep our heads above water now and can invest, 12 months down the line, we’ll be happier for it.

My only caveat is that there should be no more adverse developments. Then the time horizon may need to be stretch from a year to more.

With global markets interlinked extensively, I don’t think we are shielded from the economic turmoil in the western world. (Dalal street’s reaction to Wall st meltdown was a good example).

We need to have a game plan in place. I would say keeping some cash ready would be good, but as Subby says timing the bottom is very tough. So staggered buying in fundamentally good companies discussed here at ValuePickr is what I would be doing :slight_smile:

Regards,

Rahul

http://moneylife.in/article/if-emerging-markets-crash-will-it-be-the-us-contagion-or-home-grown/18669.html

Relevant article. Some of the points made, resonated with me.

1.Happenings in US Economy would definitely affect the US's maintrading partners, but thosetrading partnersare generally not emerging markets.

2.There is a big difference between the economies in emerging markets and the equity markets in emerging markets.

If emerging markets crash, will it be the UScontagionor home-grown?
August 05, 2011 06:26 PM
William Gamble
market-crash

Are emerging markets immune from the issuesaffectingthe US or will they be caught in another epidemicâor will the infection perhaps come from another source?

In 2008, when theUS stockmarket crashed, the markets in emerging market countries went down as well. TheUS stockmarket has been crushed; first, because of the irresponsible attitudes of itslegislatorsand now because of the possibility of the feared double dip. In contrast, the economies of many emerging markets seem very healthy. In the past the expression was that when the American economy sneezed, the world caught a cold. Are the emerging markets immune from the issuesaffectingthe US or will they be caught in another epidemic or will the infection perhaps come from another source?

The problem with the question is that it makes many assumptions that are incorrect. One of the first assumptions is that the US economy will have an impact on the economies in emerging markets. If we exclude the European Union, the US is still the largest economy in the world. Obviously if the US goes into recession, global demand will decline. But the question is who does that affect and how much?

It would definitely affect the US's maintrading partners, but thosetrading partnersare generally not emerging markets. The US's largest trading partner is not Brazil, Russia, India or China. It is Canada. China is the second largest partner as is Mexico, but most of America's trade goes to G7 countries including Germany, Japan, France andthe UK. Brazil is a large trading partner, but its total trade with the United States is slightly more than the US's trade with the Netherlands.

China's largesttrading partnerswith the exception of the US and Germany are in Asia. India has a similar profile. The main difference is that some of India's largesttrading partnersareMiddle Easternoil exporters. The trade that is most important to the emerging markets is not with the US, but with other developing countries. This is especially true for the inter-Asian trade.

We also tend to assume that the world is so connected that problems in the US will carry over to other countries. This also depends on a few factors. Germany and South Korea are major exporters. Over 40% of their GDPs are dependent on trade. Again, both are largetrading partnerswith the US, so a slowdown in America would definitely affect these countries. But others like India and Brazil are not. Only 15% of their GDP is related to trade. The US is even less. It averages about 10% of its GDP. China, the workshop of the world, is heavily dependent on global trade. Just under 30% of its economy is based on trade. So although the US economy is large, it trades mainly within North America.

There is a big difference between the economies in emerging markets and the equity markets in emerging markets. Equity markets in emerging markets are not necessarily accurate reflections of the underlying economies. Often these markets are quite small. Large parts of these markets by capitalisation may be represented by a single sector and often by a few companies. These markets are also heavily dominated by state-owned companies. Added to these issues are problems with liquidity, market manipulation and poor quality of information.

The recent rise of many of these markets has been due in part to the loose monetary conditions across developing countries as much as the growth of the local economies. The huge tide of 'risk on' foreign capital chasing yields may be more important. A 'risk off' trade could devastate emerging markets regardless of the state of their economies.

So if the growth of the US economy stalls, the effect in emerging markets would be felt, but it would not have the impact of 2008. This does not mean that these markets are safe. The difference is that the problems are within the emerging markets themselves. All of these markets are overheating. According theTheEconomist'semerging markets overheating index, the economies of Argentina, Brazil, India, Indonesia, Turkey and Vietnam have real problems. Almost all emerging markets have raisedinterest ratessome many times. Brazil has raised them five times. India has raisedinterest rates11 times. China has raised them 5 times. Many emerging markets are desperately struggling with inflation. Besides allemerging market economiestend to be unstable due to corruption, weak infrastructure, legal uncertainty and political infighting.

Credit bubbles are starting to appear particularly in Brazil and Turkey. The Chinese real estate bubble has been much discussed, but real estate prices are also at new highs in India and Brazil. Some equity markets have pulled back, but Indonesia recently hit a new high. If one BRIC falls, the panic could easily spread to all of the other emerging markets. The American economy is certainly not healthy, but unlike the emerging markets, it does not have a long way to fall.

What we need to focus is what positive and negative impact this turmoil has on India and its growth story.

1). Oil coming sharply down should help India.

2). Commodities coming down sharply again should be good for India.

3). My take on inflation is that we may be peaking out and with higher base effect the fall in inflation may take us by surprise

4). With growth being affected, RBI may be forced to go slow on interest rate hikes. In fact we may be peaking out in terms of interest rate cycle.

After looking at these factors let us consider some negatives.

There might be more where this comes from. I.e US market might provide us with even more bad news. That’s always a possibility. Plus some or the other Euro countries again has problems.

There is some talk of downgrading of Asian countries as well. I dont know how it will work out.

Till now the US markets had held on to unnecessarily high index levels inspite of everyone knowing that US is headed for trouble. So more money was flowing to the so called “safety” of US markets. Now with those markets coming down money will have to find its way to some other avenues where growth will look sure. And that might be where India might fit in.

I personally think this correction offers a good opportunity to cleanse the portfolio of non performing stocks and get into good stocks which have a good growth visibility with good balance sheets and good managements.

The one thing one has to be careful about in next few months is to keep booking regular profits partially so that one prepares for the inevitable falls associated with the repetitive bad news expected from overseas markets.

No one knows where markets are headed so it is better to focus on individual stocks and catch them at attractive levels because even during falls and corrections there will be stocks that will surely outperform.

So lets hope for the best and prepare for the worst.

Really nice points brought out…one can get lotsa new perspectives by reading them…

IMHO, trying to get a perfect macro picture is like trying to put a pair of handcuffs on an octopus!! There will be lotsa things we will miss in our analysis…

I personally think that one should build in really pessimistic assumptions in calculations relating to individual stocks. If the stock looks cheap even then, no prob in buying. If not, one can build margin of safety in volumes (have a smaller size position to start with and go reverse-pyramiding it)…this has its own pitfalls of cors, but dats another topic!

To sum-up…i personally think that how much time one should spend studying macro stuff or would it be better sticking to individual stocks…that should also be given due thought to begin with…

My 0.02 is that the markets over-reacted to the 2008 housing bubble collapse - hence the markets bounced back in less than a year - but seem to be under-reacting to the present day situation. The downgrading of the US rating impacts THE base currency of the world of which we as a nation and our industries own a sizeable chunk.

It may be politically motivated or payback or whatever, I just wish countries re-start using the gold standard for their currencies. If they dont, citizens will. Watch how gold will rocket now.

Japan was also downgraded a decade back by S&P - it’s economy is still shrinking and markets never made those high levels as in the past. With the only alternative Euro being in trouble since it has to bail out those Greeks and Spaniards, it does look bleak.

How bleak ?

I sat out the 2008 crises knowing that it will bounce back and it did. This time I intend to convert part of my stocks holdings into more risk averse assets.

We indeed live in shitty times.

)- Amit

The trend we all are witnessing is the normal cycle every market as well as every economy has to go through… Vis-a-Vis 2008, the crisis has involved countries that is a very good sign becuase when such awakening calls come, internationally leaders will go all-out to avert the crisis or atleast postpone it and domestically our managers, which are one of the best as far as managing economy is concerned, will not get complacent and will have more vigour to implement the long pending reforms… The markets which were rangebound so far have found a direction that is a positive sign and if we agree that world is not going to end then markets will turn sooner rather than later…It might give pains before we see the light but if we focus on companies, their business models, their managementand the future visibility of growth amidst these uncertainities rather than looking at markets, equity markets still are the best place to be in as Indian markets have many gems hidden out there.

Rgds.

2 strong points, Hitesh. Thanks for highlighting them.

Those bothered much by the investment media “Noise” - will do well to keep these top-of-mind.

Domestic-driven stories with good management, high growth, low debt strong balance sheet, improving margins & profitability - let’s bring the focus back on such businesses!

-Donald

1).

  1. Sorry to be the devils advocate but lower oil prices have not yet fed through to the Indian market. the Indian market is regulated and the government has not yet decreased petrol prices. It is only expected to be lowered if oil prices fall further (Acc. to petroleum minister).
  2. Also, with the mining ban in Karnataka iron ore supply is short. India is a signifcant producer of iron ore in the world market. So steel which is one of the most important commodity may not actually come down a lot. On the contrary, some auto component manufacturers are concerned about supplies.
  3. Personally I do not see margins improving for the next few qtrs. Topline growth should be fine but expecting margin improvement is a bit too optimistic.
  4. Overall its a good time to get into good companies with strong fundamentals for the long term.
  5. One thing that concerns me is that the US may start protecting jobs in the IT and BPO sector which may have an effect on the Indian consumption story. The Indian consumption story is not completely immune to the developments in the world. After all we have to sell something to the outside world in order to continue to consume.

cheers,

Subbu

1). Oil coming sharply down should help India.

2). Commodities coming down sharply again should be good for India.

Thanks Subbu. Important counter points to consider.

My sense is the “Noise” is NOT about the situation as is, but what it can lead to should things get worse from here.

If and when things get much worse, then we ARE talking about a situation where crude will fall and stay below $100, and commodities too will crash! Indian Steel demand supply situation may not be the arbitrar then. Indian company’s/economy will stand to benefit.

IT/BPO employees are a huge part of the consumption pattern in India. Also today much of the growth in consumption is coming from Rural India -NREGA, other government infra spending,etc.

A note (Equity Markets commentary) form Prashant Jain, HDFC AMC attached.

  1. Sorry to be the devils advocate but lower oil prices have not yet fed through to the Indian market. the Indian market is regulated and the government has not yet decreased petrol prices. It is only expected to be lowered if oil prices fall further (Acc. to petroleum minister).
  2. Also, with the mining ban in Karnataka iron ore supply is short. India is a signifcant producer of iron ore in the world market. So steel which is one of the most important commodity may not actually come down a lot. On the contrary, some auto component manufacturers are concerned about supplies.
  3. Personally I do not see margins improving for the next few qtrs. Topline growth should be fine but expecting margin improvement is a bit too optimistic.
  4. Overall its a good time to get into good companies with strong fundamentals for the long term.
  5. One thing that concerns me is that the US may start protecting jobs in the IT and BPO sector which may have an effect on the Indian consumption story. The Indian consumption story is not completely immune to the developments in the world. After all we have to sell something to the outside world in order to continue to consume.

cheers,

Subbu

)-

-Donald

Equity-Commentary-August-2011.pdf (32.3 KB)

Positives :

1). Oil prices coming down - a great sign.

2). Inflation will tend to fall in the coming months which signals the interest rates is almost at the peak. I expect no further hike in interest rates.

3). Monsoon is near normal - we may expect 3 to 3.5% growth in agri output.

4). There was a huge increase in the minimum wages which will drive the consumption.

5). The market has already corrected - major negatives are factored in.

6). US QE3 stimulus may be on the way.

7). The market is at reasonable valuations than in 2008- where it was in expensive zone.

Negatives:

1). FII outflow - though I feelFIIs are not that much frustrated this time.

2). Any major default in Eurozone.

Manish Vachhani

In last two recessions, it has been seen that no rating agency or analyst could predict in advance. The event occurs all of a sudden. Analysts kept teelling that few major corrections are normal in any bull rally and market will bounce back vigorously. But did not happen.

So we may safely assume that predicting recession and market are next to impossible and concentrate on fundamentally strong growth companies.

Thanks Donald. I guess ultimately my view is that from a long-term perspective (5-10 years) this is a good buying opportunity. However, from a short-term perspective its almost impossible to predict.

I just read that Nouriel Roubini who had predicted the 2008 crisis is predicting another recession for the US and a hard landing for china in 2013.

Thanks for the equity commentary as well. It was a good read.

I guess our job here is to find out solid companies trading at reasonable valuations (with a good margin of safety).