Sunday, February 10, 2008

Bracing up for Recession

Looks like this is gonna be recession year in the US. Recession means a drop in economic activity and associated with drop in investments, company profits and employment rates. How this going to affect various people?

First, interest rates will significantly drop as a reaction to recessionary pressures, and couple with high unemployment rates and inflation, this looks to be bad for saving money :-(. However, this seems to be right time to take a look on basic things. Based on my readings I find the following to be the reasonable advice for people like me.

1. Dont leave secure jobs, as job market will go south this year.
2. This is not the best time to go to school for doing MBA and such, as markets might tighten up in the next year. But, a lot of experienced folks who can untangle the mortgage mess and stuff will find great jobs.
3. Maintain 6 month emergency fund that should take care of ourself even if we dont have job for a long period. This fund must be maintained separately in money market or savings accounts.
4. Reconsider the portfolio. While stocks do better in the long term, it is time to reduce the risk by taking bit more of bonds and other secure avenues. I moved mostly to secured investments last October, and could wither some of the drop in my retirement plan.
5. Rethink investments. As big ticket investments like starting companies or building houses will be hit during this recession, it is time to reconsider those things for now.

If we are able to maintain jobs and have savings cushion, recession could also be a great time. A lot of great investment opportunites will be available at the later part of recession when everybody else will run out of cash. Houses and companies could be got for dirt-cheap prices and the recession will also help the economy overall by cutting down wasteful expenditures and over consumption while moderating the prices (of oil, houses etc that had runaway inflation during the current boom).

In terms of countries, the expectation seems to be that China and India will cool down affording them to rethink their policies and priorites. China will be hit by drop in exports, while India will be hit by drop in investments. So, its time for China to put renewed focus on domestic consumption (including by appreciating Yuan) and India to start second wave of reforms. When India badly needs money it can no longer afford to keep sectors like Banking, Aviation, Retail stores under tight leash and might be forced to open these to foreign investments. Dollar looks to get weakened more as there is a substantial interest rate gap between India and US, and IT companies will be hit both by strong rupee and a drop in US economic activity. Its time to rein in the India's runaway salary growth and diversify beyond IT.

India can gain a lot. First, if IT weakens a bit and salaries start cooling down, other Indian sectors like Auto and manufacturing can pick up as they can get quality engineers at affordable salaries. It makes no sense for the nation to train a mechanical engineer only to lose to Infosys to do some payroll processing. Also, this recession could get the hell out of Ford and GM who would be forced to do a lot of offshoring and India seems to be the best choice. Already Tata Motors and Hyundai and have begun huge expansionary cycles. And healthy Indian companies can get great bargains with a weak western economy. I wont be even surprized if a group of Indian companies together buy up Ford in the next decade. Also, its time to realize our strengths in Finance and Banking. Its illustrative to note that almost all of the Citi's current top management are Indians and we have similiar loads of talent hidden in our moribund banking sector. Its time to get to Basel-II banking standards and open them to International capital and competition. Maybe, someday we could see a ICICI or a privately owned SBI could take on Citi or Bank of America in head on competition in international turf.

Second, Indian economy can also gain by cooling down of real-estate markets at home. Just like Americans, Indians seem to harbor the thought that house prices can never go down. Americans have learnt the lesson and Indians have still not. Just like any investment, house prices can as much go up as down. A lot of houses are priced at 100 times the annual per-capita income of Indians and the development looks unsustainable as a lot of them were made with unreasonable expectations of salary growth. Now, house prices can go down significantly in a lot of over-priced markets and this will improve affordability for common man.

Third, the market crash will make people rethink consumption. While too much dropping of consumption is bad, too much of consumption is even more bad. Indians are consuming rather too much for their salary levels and savings are not as great as Asian levels. This can hurt a lot of people in the forthcoming real-estate and stock crash, and if managed correctly this could lead to a long term balance between savings and consumption.


As i see it said...

About leaving job for school.. I am not convinced yet. A MBA gets a good job recession or not (courtesy IIMA site). Also, i completely agree that Indian IT companies will start cutting back their exorbitant salaries which were US driven to start with anyways. I am also guessin g that the indian sensex would hit around 12000 and remain there. India, no matter what people may say, has strong fundamentals. Interestingly, I am not sure if investing in US bonds now will make sense for the future. I am guessing looking europe would be sensible. I completely agree that Indian financial institutions would need to seize the opportunity and try to play big during this recession.

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Raji said...

Gud one.As you said, IT should definitely have a set back for other fields to flourish and Indians to think working towards their passion in other fields.