Samvat 2064 is being born in very difficult circumstances, surrounded by many grave dangers. A massive credit crisis in the mature economies, fears of recession in the US, soaring oil prices and a plummeting dollar have led to investors taking refuge the ultimate safe haven—gold.
In the home market, foreign institutional investor inflows have slowed from a raging torrent to a dribble, the surging rupee has mauled exporters and high interest rates have taken their toll on consumer spending.
Economic growth depends more and more on the prop of investment demand. Bears that have been hibernating for years have started to come out of the woods. As Indicus Analytics Pvt. Ltd’s Sumita Kale and Laveesh Bhandari write in their November newsletter: “The Indian economy will continue to do well as the growth momentum is strong, but the economy is highly integrated now and international news is not good. At some point, the negative international impulse will combine with underlying inflationary pressures, impact of high rupee value, and high interest rates. The large rises now will be followed by a large fall in the stock market— when that will happen, we have no clue.”
Market breadth has become very narrow, with more and more money chasing a smaller and smaller clutch of stocks.
So will Samvat 2064 grow up to health and wealth, will it collapse and take to the sick bed, or will it limp along? The base case for the global economy, backed by the International Monetary Fund (IMF), seems to be that while the US economy will slow down, it won’t tumble into a recession and the rest of the world will chug along pretty well.
That’s the famous decoupling thesis. Building on that, market strategists have said emerging markets will become safe havens and funds fleeing the financial badlands of the US and Europe will find refuge in high-growth economies such as China and India.
And while that will result in a bubble which will inevitably burst in the future, investors should enjoy the rise while it lasts.
The trouble is that sounds a lot like what Chuck Prince, Citigroup Inc.’s ex-chief executive, said a few months back to the Financial Times: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Prince’s dancing days got over rather early.
On the other hand, the bears believe the credit crunch will shrink bank balance sheets and diminish market liquidity, as banks become less willing to lend and as the over-the-counter derivative markets dry up. Together with a severe downturn in the US economy, their view is that this will hurt all asset classes. The momentum that led to a rise in prices of all assets in the last four years will now be reversed.
But Samvat 2064 has a powerful, if rather unlikely, fairy godmother in the shape of Ben Bernanke, chairman of the US Federal Reserve. He has already been more than willing to flood the market with liquidity by reducing the US policy rate and we have all seen what happened to emerging markets when he cut the Fed funds rate in September, although the impact of the encore in October was far more muted.
It’s no wonder that while Merrill Lynch & Co. Inc.’s October survey of fund managers found them depressed about the state of the global economy, as many as 40% said they would be overweight emerging market stocks in the next 12 months. And with the dollar dipping to new lows every day, non-dollar assets look increasingly enticing, particularly in markets such as India, where the central bank has followed a policy of allowing a gradual appreciation of the local currency.
Will the fairy godmother’s liquidity injections inoculate Samvat 2064 against the global chill? What if rising inflows result in capital controls by the Reserve Bank of India and the finance ministry? Or should fairy godmothers be, as a general rule, confined to fairy tales? These will decide the fate of Samvat 2064.
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