For all the screaming headlines, the extent of damage done to stock markets by the so-called “credit crunch” has so far been remarkably little. The MSCI World Index, for example, has fallen just 5.2% since the sell-off started. Emerging markets have had a more difficult time and the MSCI Emerging Markets Asia index fell 9.4% between 25 July and 10 August. Back home, the Sensex has fallen all of 5% between the 26 July close and the 10 August close. The mid-cap index has had an even easier time, down 4.2%, while the small-cap index is down a mere 3%.
Much is being made of the question whether this is an opportunity for those who buy on dips to enter. But what exactly should they buy? Do you believe in the strength of the Indian economy and want to buy State Bank of India as a proxy for the economy? Well, the scrip is up 3.3% from its close on 26 July, when all the talk of a credit crunch started. Perhaps you think that India’s advantage in IT is impregnable? Well, Tata Consultancy Services is down just 3.4%. Perhaps you would like to bet on the prospects of one of the world’s best refineries? Reliance Petroleum is down 0.7%. What about India’s manufacturing revolution in auto ancillaries? Amtek India is up 1.9% from its 26 July close. Want to go defensive and play the FMCG counters? Marico is up 3.6%. Perhaps you believe that nothing will derail the infrastructure boom? Bharat Heavy Electricals Ltd is down 3.5% and Crompton Greaves up 6.3%. Fancy a defensive position in the pharma space? Dabur Pharma is up 2.3%, while Ranbaxy is down 1.5%. Want to punt on a momentum stock? Reliance Natural Resources is up 9.2%. Of course, many stocks that have fallen more than the average—Reliance Industries is down 7.5%—but the buying opportunities are far from being across the board. So far, the market has just had a normal bull market correction.
And guess what’s happening in the US, the fountainhead of all the troubles? The Dow Jones Industrial Average is down 4% since the sell-off started. The US seems to have once again done a wonderful job of exporting its problems. Or perhaps the US Fed has done a good job of riding to the rescue.
The US as safe haven
How has the traditional safe haven, gold, performed during the scare? NCDEX gold futures prices are lower now than where they were on 25 July. Internationally, too, gold priced in US dollars has seen a fall after the start of the sell-off in equities. That’s because funds, especially hedge funds, are diversified across a wide range of commodities and a fall in one asset class prompts a sell-off in all others. That’s probably the reason why the prices of crude oil and other commodities too have fallen, although part of it could be genuine concern that credit concerns will slow growth.
Consider, however, the strange case of the US dollar. The US currency had been falling against all other currencies for quite some time, due to low growth in the US, due to interest rate differentials between it and other currencies being lowered as other central banks hiked rates and because of the massive US current account deficit. But a strange thing happened as soon as the credit scare hit the equities market—the US dollar index, which measures the performance of the currency against six major world currencies, started moving up. The dollar index spiked after 25 June, rising and falling inversely with the stock market. Its current level is well above its lows at the beginning of the equities sell-off. The inter-bank rate for the euro against the US dollar was 1.38230 on 25 July, fell to a low of 1.3640 before pulling back to 1.37570 last Friday. Clearly, the dollar is a safe haven currency. Whenever risks increase, investors flock to the dollar.
That’s also seen from the data collated by EPFR Global, the outfit that tracks fund flows around the world. According to its analysis, inflows into US equity funds were the strongest in the week ended 10 August since EPFR began tracking them five years ago. According to EPFR, “This move towards the perceived safety of US assets and cash came primarily at the expense of Europe and Japan equity, real estate sector and high-yield bond funds.” The preference for the US as a safe haven is completely irrational, evident from the fact that its real estate sector is the source of the problem. Nevertheless, it does explain why the US equity market was one of the least affected among global stock markets. The irony is that the market with the highest risk is the one that investors are running to.
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