CNBC-TV18's research analyst, Haresh Soneji:  

• Oil is at a record high and Goldman predicts oil at $ 200
• Gold trades at around $ 900 an ounce
• Prices for food articles are sky rocketing
• Cyclone and earthquake in Myanmar and China would further fuel food prices
• Inflation in emerging markets is at its peak, threatening to rise further
• Sub prime losses are estimated to be beyond $1 trillion
• US is in a recession and its election year
• And all eyes are now on the Chinese economy post Olympics
• Back home, India Inc.’s fighting off leverage to exotic derivatives
• India’s March industrial production growth is at a dismal 3%

From where and how fast will the crack begin can fairly be assumed as secondary issues? What is most important to know and evaluate options on is the fact that the global economies and markets are seriously headed for an upheaval. Things are itchy with global concerns at high levels. To me, the ‘red button’ is already flashing and its time to take preventive action.

One may point that it’s a strong statement to make. More so, in the wake of experts confidently spouting that the worst on the sub prime led troubles are behind us. And though US would be in recession, the global economy will sail through. So, to make a qualitative statement such as the one made above may be all but argumentative. But, I am ready to debate and defend.

To begin with, let’s accept the fact that things are not as hunky dory. Is it safe to assume that India’s great Bull Run which started April 2003 is over now? Or is there some steam left? It’s a tough one, but the answer maybe not be in the affirmative. Corporate earnings for the past few quarters have been supported by other income. And the quality of earnings for FY08 has diluted significantly. 70% of the companies reported a drop in net operating cash flows. And while the APAT growth has been some 18%, the cash flow yield has dropped some 20%. To put a long term scenario, India has been in a Bull market since liberalization and the capital market has gained significantly. But, interim corrections are inevitable. The average length of a bear market historically has been some 10-odd months, which shaves off some 40-50% of the benchmark index. We’ve done 30% odd, followed by a recovery. But, with India Inc. growth slowing down, it appears more likely that earnings may have a downside risk than the other way round. Experts are anticipating a 10-15% growth in earnings. Core earnings could be lower. Also, risk appetite surely is declining, so will the risk premiums slide in the future. To an extent, risk premiums have already begun to slide. For instance, India used to command a 300-400 bps (basis points, 100 bps = 1%) risk premium, which has halved.

Next, big capex will go mainstream only by end FY09. In all scenario and if the projects get rolling on time, the results would begin to show during FY10. In the past, we have always witnessed India Inc. postponing projects if demand slows. Are we already seeing this happening? The answer is yes. Take in case the real estate players. They have already slowed down on their existing projects and delayed their new projects. Perhaps the entry of PE players in the real estate sector may push up governance. Other sectors may witness the same.

Globally, the election year in the US always see a rebound in equities. There are numerous studies depicting relations of Presidential Election years with stock market cycles. You don’t need to reinvent the wheel on that front. It’s happening this time round too and things may not be in comfort zone. In fact, US markets historically enters ‘trough’ zone post elections. And we have already seen from the current correction in emerging markets including India that decoupling from US is a distant dream.

And things are not as good in emerging markets either. Situations seem to go out of control. And to my mind, China emerging post Olympics would be one story to watch out for. It’s a big one. Economies tend to collapse post hosting Olympics. Also, experts tout China would become net exporter of metals and other essential infra commodities. China has been fighting inflation which recently rocketed to a 12-year high. If China does a ‘hard landing’, the world will have another concern.

This brings us to the India growth story. No doubt industrial production slowed down. But that appears to be an erratic movement. The long term story is there for real and it will surely sprout. But that’s really long term. In the short to mid term, India has to fight situations at hand – inflation, elections, rising rupee and impacts thereof.

Overall, on a macro level, things look itchy. It appears to be like a house build with a pack of cards. One card gives way and the entire house collapses. For the global economies and markets, which card will it be this time round?

Disclosure: The author is not permitted to trade and/or invest into the equity market directly or indirectly, apart from investing (long only) in mutual fund products. His equity exposure is only to the extent of ESOPs granted by the employer.