Wednesday, May 05, 2010

Not a good time for any stock market

Airline and automobile industry have always been GDP multipliers. That is because of the huge direct and indirect employment they generate, both upstream (component and ancillaries manufacture, assembly, services) and downstream (sales, service/ maintenance, spares, travel and tourism) besides the airline manufacturers and operators themselves. When any of these industries get hit, the economy gets multiple hits.

Of the two, the airline industry is more vulnerable to random hits, because of the global nature of their operations. Not only are they buffeted by almost every risk there is, including terrorism, hijacking, fuel price and availability risk, currency fluctuation/market volatility risks, political and taxation-related risks, etc., but they are also vulnerable to Mother Nature – sudden “clear air turbulence”, volcanic ash, storms, lightning and bird strikes, storms, besides risks arising out of mechanical, electrical, hydraulic and electronic failures, Air Traffic Controllers' errors, pilot error, irate governments who impound planes to score political points, militant cabin crew and pilot unions, irate customers demanding refunds and free accommodation, careless loaders, .... the list is endless. There is no other industry I can think of, that has such a profusion of risks to contend with every single day. Of course, the insurance industry is a close second.

The automobile industry is already doing very badly in all countries save China and India, thanks to the 2008-9 meltdown and recession, and these two markets are becoming hyper-competitive, thinning the margins and making the business environment even more difficult for all players.

When both these industries are doing badly, it is well nigh impossible for any economy to grow, especially in developed countries where markets are already very developed, saturated and competitive. Add to this fiscal profligacy of successive governments and you have a great recipe for financial disaster. This is what Europe and the Euro area is facing today.

With growth rates of all these economies being in the low single digits where positive, and negative in most places, it does not take much to knock an economy, and by extension, due to globalization, an entire region, off-balance. The recent volcanic ash episodes have paralyzed much of Europe, especially the UK for upto a week. Given that a week is almost 2% of a year, loss of such a level of business more than once in a year is a luxury that any European country can ill-afford. We are already into the second bout of airport and airspace closures, and Katla, the bigger next-door volcano, has yet to erupt! Add to it the cost and turmoil of elections (in the UK), fiscal profligacy (Greece, Spain and Portugal) and strikes and unrest (Greece) and it would be a very credulous person who would bet on the European economy growing over the next two years.

Because of the very interconnected nature of markets, it takes seconds, not years, for any contagion, whether of optimism or pessimism, to travel across the globe. So brace yourself for stock market failures. This contagion will definitely travel to India, for no mistake of it own, except Indian markets' connectedness with world markets and contagiousness of investor sentiment. 

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