Stock Markets: Where are we headed ?

Posted on July 20, 2008. Filed under: bears n bulls, buzz in the biz today, macro finance, opinions | Tags: Banking, commodities, Finance, infotech, investment, IT, real estate, recession, rentals, returns, shares, slowdown, Speculation, stock market, Tier 1, Tier 2, Tier 3, US slowdown |

Where are we headed

Now that most of the commentators on Dalal street have been proved wrong, we all stare at the future, thinking where are we headed next.

Some say the pain “may” be over one day, the other day they say there “might” still be some more downside. How can you have a view which is in may and mights. I have been following the stock market for a few years now. The targets for specific stocks are based on pure hunch of the speaker and seem to have no logic what so ever, and that is always followed by “may/might” theory.

Anyways, analyzing the current situation, what the sectors to look at and why. I will mention only about sector I know about or have studied.

1. Banking/Finance: The credit crisis has shown a spectacular uptrend in the last few months. This trend threatens to continue for a few more months as the credit criteria continue to tighten for all lenders. This trend will see a further increase in losses till we reach the peak before starting the downward journey. The credit cycle typically takes 24 months to stabilize, and we can expect things returning to normal only in the last quarter of 2009. Meanwhile, since lending will reduce, there will be lesser and lesser balance sheet by the day; hence one can expect lowering of profits because of runoffs as well. So a double whammy, lower revenues – because of lower new loans and older loans paying off and higher credit losses.

I would suggest staying away from all companies which are too focused on consumer lending.

1. Real Estate: This sector has reached a level of typical saturation, ala FMCG. The prices will not see much growth, unless they are differentiated products – like a “Healthy Living” township or “Build Tomorrows leaders” township. Smaller players will have to go niche, and larger players will have to go volume. If you are invested in a vanilla small player, please exit the counter. The home prices will remain more or less stable in tier 1 cities, may be 5-10% drop in suburbs. Tier 2 and tier 3 cities will crumble up to 20%, esp since the developers here are typically local builders, who can undercut larger players with their cost efficiencies. A branded national player may just end up being a status symbol in these cities. Also, the rentals in tier 2 and tier 3 are very low, taking the regular investment return out of picture for the investor. The speculative demand will die down for lack of growth prospects.
2. Commodities: Like all rallies, commodities rally is about to get over there will be a sharp correction in the prices of lot of commodities, largely because of speculator interest.

IT : Info tech stocks are a risky bet right now. The US slowdown has not yet gone into a full fledged recession yet. My guess is in the next 3 months we will see some bad news in this sector as bigger giants start looking at their spending.