World economy and emerging markets in particular have had a spectacular bull run over the past 5-6 years. Moreover it had been a bull run across all of the asset classes – crude, metals, stocks, gold. As with all bull runs industries went from undercapacity, ramping up for growth to overcapacity and fears of recession, scaling down of growth plans. To compound the problem of recession and market downturn are the liquidity concerns looming over the world economy following sub-prime blowout.
Standing a short distance away from the business cycle and taking a broader, wider and longer look, one can see that the fundamental growth in emerging countries, India in particular, have not come to a halt. Salaries and incomes of Indian middle class have risen by a multiple and this will result in robust internal consumption. Long term infrastructure projects (power, ports, roads) are all well financed and those businesses will act as a steadying influence on the market. These projects are mostly financed via equity route and not via debt route which ensures good financial health of the company.
There is more uncertainty, rumors and fear than concrete downturn in the market. The Indian central bank (RBI) has been very proactive, cautious and rational. It has done a fantastic job. When the equity market was gung ho it was cautious, on fear of runaway inflation it clamped down on the liquidity in the market and now when pessimism is at its peak it has started to infuse money into the market. Fear in public mind has been compounded by the relentless media coverage and enlarging each and every news into national disasters. Comparing this downturn with 1929 recession at every chance they can, they have forgotten that unlike 1929, central banks and central governments world over are monitoring the markets and are not shy in trying to interfere where needed. This is not to say that situation is not bad, but we have become used to overreacting – be it being over optimistic or over pessimistic. To give you a perspective, during the 1990-91 recession IBM had laid off over 114000 people and GE during its restructuring phase had laid of over 250000 people. In contrast, if some investment bank announces to lay off 150-1000 people it becomes the central news.
One of the ways preferred by economists of infusing money in a recessionary and risk averse market has been through infrastructure projects. Pessimism will lead to better, sharper focus and tightening of belts.
One only needs to keep ones head when all around them are losing theirs. The venerable Warren Buffett who has over 40 years of experience of economic cycles and upheavals is investing and buying because this is the right time to build businesses, investments, customer loyalty and business relations.
