MUMBAI: It’s that time of the year when every one sits back and reminisces over the events and achievements. Unfortunately, 2008 will likely be considered the worst for the world-both on economic and personal fronts. For the financial markets, the year began on buoyant note, with the equity indices scaling new highs. However, the euphoria was cut short in the first month itself after the US sub-prime issue came to light.

The credit crisis that followed has forced all the major economies into recession. And these conditions are likely to continue well into the New Year, is a world economy in recession verging on deflation.

As the US is sinking deeper into economic despair, more grim news is expected in the months ahead. Employers cut payrolls in November at the fastest pace in 34 years as the unemployment rate rose to 6.7 percent, the highest level since 1993. The month’s 553,000 drop in jobs brought cumulative losses in 2008 to nearly 2 million, and the total number of unemployed Americans increased to 10.3 million.

The various stimulus packages announced by the US government to check the rut in the financial system and rate cuts to bail industries and the economy out recession have failed to have the requisite impact.

In its latest move on Dec 16, the US Federal Reserve cut interest rates to an all-time low, a move aimed at reassuring financial markets and stimulating banks to lend money. The board lowered the target federal funds rate to a range of 0 percent to 0.25 per cent, the lowest level in the history of modern monetary policy.

Japan, too, slashed its interest rate to 0.25 per cent and announced stimulus packages. The European Central Bank and Bank of England also have taken a similar path.

However, conditions have deteriorated so much since its semi-annual World Economic Outlook was released in October, that the IMF issued an update last month cutting its 2009 forecast for developed countries’ economies to a drop of 0.3 percent, from 0.5 percent growth in the previous estimate. Such a decline would mark the first contraction in any year since World War II.

Overall, the IMF now expects the world economy to grow at a 2.2 percent pace in 2009, down from its October projection of 3 per cent. Developing economies are projected to see GDP growth rate at 5 per cent, despite diving commodity prices that have hit oil exporters especially hard.

In the Indian context, the country’s WPI inflation rate soared to 12.91 per cent in August before cooling this month to 6.61 per cent for the week ended Dec 13. The Index of Industrial Production showed a negative growth for the first time in 15 years of 0.4 per cent for the month of October.

The rapid economic slowdown has prompted Reserve Bank of India to cut key rates by 250 basis points along with 350 basis points reduction in CRR, and the government to announce incentives for the realty and go on additional infrastructure spending. nder the circumstances, what should one expect from the New Year? Kotak Securities Managing Director, Narayan S A, said, “There has been an

outflow of liquidity from the equity markets and Indian companies have found it difficult to access funds for expansion. This has had an impact on India’s growth, which is expected to moderate to around 6-7% in FY09. This will have an impact on the growth of the corporate sector and this impact may continue in the foreseeable future.”

Speaking on the markets, he said, “We see the Sensex moving in the range of 9,000-12,000. Further uptrend can be expected only after clarity emerges on the global economic growth and extent of impact on India. The risks are a fractured mandate in elections and more global economic turmoil.”

Among sectors, Kotak Securities expects select stocks in pharmaceuticals, PSU banks, power, construction and capital goods sectors to perform well. Large players in infrastructure less dependent on raising fresh capital from market will outperform.

Looking back, Angel Broking’s CMD Dinesh Thakkar said, “2008 was terrifically challenging for our markets, and events dampened investor confidence when portfolio values diminished with the capitulation of prices.”

On what he expects in 2009, Thakkar said, “Given the fall in the market in 2008, we will greet 2009 with considerable skepticism. However, this is not the only time that intrinsic value, which emerged after the market carnage, has been tested. Clearly, this value will impede any further declines due to slow growth in corporate earnings.”

“A review of the 2001 era as well as other global recessionary phases confirms that bottoms were considered when ‘gloom and doom’ ran rampant, but these phases were succeeded by bull runs. The current sentiments and valuations are similar to those from 2001 yet that year was followed by the largest bull market, which produced a sevenfold increase in the Sensex. History demonstrates that recessions ultimately yield to resurgence, but this reality is always doubted in troubled times,” Thakkar added.

On the last day of 2008, the BSE Sensex closed at 9,647.31, yielding 10,639.68 points or 52.45 per cent from last year’s close of 20,286.99.

The NSE’s benchmark Nifty lost 3,179.45 points or 51.79 per cent from the 6138.6 level on Dec 31, 2007 to close at 2959.15.
Commenting on the real economy Thakkar said, “For growing economies–particularly India’s–the writing is on the wall: growth will return. By lowering the interest rates and providing fiscal stimulus, the RBI and the government have set the wheels in motion, which should revive demand and consumer spending in our under-penetrated markets. Soon, corporations will regain their velocity as profitability returns. They will resume investing and generating new employment, thus creating demand for their products. The coming year will allow us to re-live our experiences in wealth creation and multiply our returns on the bourses; it represents an opportunity waiting to be seized. Hence, rejoice; happy days are around the corner.”

However, Kreg and Bordman’s principle economist, Jonathan Paul sees 2009 being an extreme year for the global economy. “I don’t believe in more of the same. Either things will get better or get worse. The one thing they won’t, is to stay the same.”

He expects that BRIC countries (Brazil, Russia, India and China) will have a terrible year. However, China will compete with the US on who has the bigger government-led infrastructure program. In US, President-elect Obama will likely to fail in creating new and permanent jobs.

Paul further predicts that one of the big three US auto makers will diminish but it will, however, mark the beginning of the auto industry’s recovery. The fourth quarter earnings reports will be in doldrums and the Dow will plunge to the 7000 mark in near term.

source: Economictimes

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