The next round of pain for global financial markets appears to have begun. A rally in the last week of October seems to have petered out due to the emergence of fresh negative news across regions. Global stock markets, most notably the Dow Jones, clearly look set for a new low. Not that there was any doubt in the first place, as highlighted by the reluctance of markets to respond positively to huge stimulus packages announced by Governments, the latest being China. It would seem rallies are being used to exit holdings rather than initiate fresh longs.
What started out as the subprime crisis lead to the credit crisis and is penetrating into the real economy. It is worthwhile to note the overwhelmingly pessimistic picture painted by economic indicators. Consumer sentiment, business sentiment and industrial activity are at record lows in several countries. The automobile industry is the focus of the bad news presently, as a possible bankruptcy hovers over General Motors. CNBC carried a report which, citing private studies estimates said about 2.4 million jobs could be lost if General Motors, Ford or Chrysler were to go belly up, a scary scenario indeed.
In India, the scenario is grim to say the least. A lot of industries have resorted to shutdowns whilst cost saving seems to be a top priority these days. To put things into context, the Tata group has asked its group companies to put all acquisitions on hold unless absolutely necessary and focus on optimizing costs. Needless to say, industrial production figures are likely to nose dive and drag capital goods stocks like Larsen & Toubro, BHEL & Siemens lower.
The pain felt by investors globally is going to be much longer than anticipated. I believe the pain could linger on for another 3-6 months, as equity markets tend to bottom out earlier than the real economy. I believe expectations for an economic recovery in 2010 should help equity markets bounce back from the present downtrend, it wouldn't be a surprise to see a strong showing for equities in 2009 even as the flow of adverse economic news reaches a zenith.
Though in the short term, I personally do not want to try and catch a falling knife, i.e. try bottom fishing. I would rather wait for things to settle and then take a relook at the markets. For all of us its the time to buckle up and sit tight, since the last and possibly, the most painful leg of the bumpy ride has begun.
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