A spectre is haunting us. That of recession. And the scenario it creates is scary, what with stark images of long queues of the unemployed with grim faces. Is this prospect closer home than ever? In a recessionary phase, yes, it would be.
Recession or slowdown?: So is the economy in a recession? Or has it just slowed down? The debate rages on. In spite of the elusive consensus, almost everyone agrees that something is wrong with the economy. Today, after five years of liberalisation, the industrial growth rate has started showing a downtrend. But all is not lost yet. The majority verdict is that what is unfolding is not a recession, but a slowdown.
Good news? In a way, yes. In the case of a slowdown, the degree of damages would be less, and recovery would be faster. But the point is that while you wait for a definitive verdict, it is getting too late for the proverbial stitch. Isnt it time to investigate what all this means to you both as an individual and an investor? At least, you should be prepared for what lies ahead.
For starters, a high rate of inflation is common to most developing countries. And the deflationary measures of the central bank will trigger off recessionary trends in the economy. The first sign is the industrial slowdown. Persistence of a slowdown will translate into a recession. At this stage, stagnation creeps into the economy, the income level falls so does the rate of inflation.
If you were to go by the standard four-part economic cycle, a development phase will be followed by a take off, then by growth and finally by a recession. If so, why are both the masses and economists so scared of a recessionary phase, you ask? Explains M T Raju, dean of the UTI Institute of Capital Markets, Recession is a very serious issue, which has a long, painful recovery period. A turnaround is possible only through a series of imaginative measures like pumping in cheap money into the system, creating additional capacities, etc.
At the moment, we are at the nascent stage of our economy. It is quite as much safe as well as possible to sustain a seven per cent growth annually for the next decade. Countries like Taiwan, South Korea have been growing above this rate for more than a decade, there is no sight of a recession as yet. We are no where near the optimum utilisation of our resources, he adds.
Echoes Bharat Shah, chief of Birla Capital International AMC, What we are witnessing today is just a slowdown. The overall demand for commodities hasnt gone down at all, hallmark of a recessionary economy, reminds A K Gangooly, joint general manager, LIC AMC. Note the unanimity in these opinions: There is no saturation in the overall demand for products at all.
Instead, lets see why this crisis has occurred. It is easy to name at least one of the factors that have brought it about: political uncertainty. Others pinpoint the erstwhile monetary policy which concentrated on inflation control and restricted the money supply, causing a contraction of money. A decline in foreign investment added its bit. As far as the capital markets are concerned all the intermediaries are to be blamed for the present state of affairs.
Fallout: Reason and cause apart, when a recession or slowdown knocks at your door, do you have the choice of answering? No such luxuries for an economical animal like you. Like the guy next door, you too will reel under its impact. Invariably, it will leave its mark on your income, expense, capital, investment, etc.
Job prospects will be bad. This applies to both the existing as well as new ones, says Raju gloomily. Naturally, income levels may dip. And your appetite for products too will wane. That sets the vicious cycle in motion. Less demand for products will punch a few holes in the bottomline of the manufacturers.
But for those in the government sector things remain the same. The agricultural and unorganised sectors too will be untouched by these worrying developments to a great extent.
You know, the economic slowdown will leave the corporate bottomline frayed, that means no dividend, rights, bonuses, etc for the shareholder. This is bad news for the secondary market. The primary market will also reel under the pressure of a lacklustre secondary market.
If this is beginning to resemble Nostradamus doomsday eventuality, uncrease your furrowed brow! All these factors have been discounted in the market, opines Gangooly. Having already discounted the 1996-97 results, the future now hinges on the next Union budget and the political situation. Many hope that the budget will spring a cure for the slowdown. For instance, taming the deficit or the oil price deficit will prove effective. Or else, the economy will be moving closer to a recessionary phase, warns Raju.
Fire-fighting: Time for the proverbial stitch. The mantra is still quality scrips. Select quality growth scrips to tide over the bad times. Hold on to them to book medium to long term gains. Dump speculation or lose your shirt in the process. Dont be taken by the ups and downs of the market. Have a long term perspective. That sets the tone.
Now for the next step. How do you identify the right industry and company? The task does not warrant a new set of tools. Quality with foresight is the key term here. Select first-rate companies, which are inelastic to the foreign competition, says Raju. That is, the companys profits wont react violently in the face of tough foreign competition.
This is very crucial. In the wake of the WTO treaty, it is very likely that foreign players might increasingly export goods to our country, especially if they can compete on the price factor. More so, since most Asian success stories are blessed by a cheap labour force as India.
Sadly, this time around, apart from a weak anti-dumping tax, the country has no major combat arms. In short, focus on sectors like cement, sugar, software, tea, etc where others cant compete with domestic companies, at least in competitive pricing.
And, of course, the MNCs continue to be a safe bet, reminds Shah. Consumer non-durable, pharmaceuticals, personal care and export-oriented firms are also safe bets, he adds. The idea is to bank on industries which are not cyclical in nature, or in other words, less prone to fluctuations.
While selecting the companies look for a longer track record. And give due importance to the management. For instance, see how quickly they adapted to the situation after the liberalisation. Buy the winner scrip even if it is initially a little costlier. You can book medium to long term gains, assures Gangooly. Lastly, dont bank on cheap scrips to make mega bucks.
As for debt, the only viable alternative to equity, the issue remains the same. Absence of a secondary market compounds the risk as it effectively blocks an exit route before the call, cautions Shah. Since neither the manufacturing concerns nor financing firms are about to make quick bucks on an economic slowdown, banking on them will prove costly.
But finally, there is hope. After all, what goes down must surely come up.
