Memories of the Great Depression rekindled

We as investors can never forget the last two weeks. Deteriorating confidence and weakening economic fundamentals has rendered us helpless. The growth engine of world economy i.e. Uncle Sam looks pretty tired and might go in reverse gear. All we can talk about is gloom and doom. The much talked about American way of living has been severely affected. People have simply stopped flying. The direct affect has been thousands of layoff, and slowdown in oil, aluminium and travel industries. The other major sectors of US economy affected by the despicable act are insurance and hospitality. Due to the increasing interdependence of economic pockets and cross linkages a drowning industry can take others down with it. People have already started talking about recession; in fact, we can see comparison being made with the Great Depression in the pink papers. The already slowing US Economy now has hit the wall and if it manages to evade a prolonged recession it would be nothing short of miracle.

What to expect
The Fed’s Open Market Committee meets on October 2 and is widely expected to cut its 3.00 percent federal funds rate. Already thousands of US jobs have been lost in the airline industry alone since the attack. Economists polled by Reuters see a loss of 102,000 jobs in this month’s report, after 113,000 in August. In Japan, the ‘tankan’ business survey for September will be out on Monday and is expected to cause a sharp deterioration of sentiment.

The list of companies affected is huge and almost all clients of Indian software companies have a mention there. Indian companies have been strong in servicing Insurance, financial services and telecom companies. All these sectors are severely affected and things are not expected to improve any time soon. The only relief has been GE’s maintained guidance of double-digit growth. GE is one of the biggest buyers of Indian software services.

Among the companies citing difficult times ahead are chip major AMD, package delivery company UPS, beauty product company Estee Lauder, speciality chemicals company Praxir, Real estate company Cendant, Sony, NEC... the list goes on. The argument of some Indian companies catering to a particular industry in the US and not to the one that has been affected no more stands true; and there is more to come.

Desi Problems
Indian Stocks markets are in turmoil affected by global uncertainties. Almost all the tech stocks are now having a single digit PE. The others too are expected to touch that zone if bad news keeps coming. Last week saw volatility in Wipro and HCL Tech. Markets were abuzz with HCL coming out with a warning and the stock was severely beaten. However, it did recover marginally after the management’s reiteration of its earnings guidance. HCL Tech also has bought 51 percent stake in a software services subsidiary of Deutsche Bank. The company has paid Rs 120 crore cash in consideration for the Rs 90 crore company.

Wipro counter too was abuzz with the possibility of it issuing an earnings warning and rumours of salary cuts for top management. However, it too recovered touching a four-digit figure.

Besides all tech related worries, we now have to worry about our slowing economy too. All agencies are now regularly revising (downward) the GDP growth estimates. This will have a direct bearing on the sensex and subsequently all sectors even if its tech.
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