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Frogs in boiling water

Frogs in boiling water
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First Published: Mon, Jul 18 2011. 11 51 PM IST
Updated: Mon, Jul 18 2011. 11 51 PM IST
It is the law of Murphy that when one is on holidays, important things happen that need to be and deserve to be covered. I am not referring to the triple bomb blasts in Mumbai on 13 July evening. We do not know the identity of the perpetrators, although it is not difficult to guess. We do not anticipate a communal reaction in Mumbai or elsewhere in India. However, it adds to the sense of drift, chaos and confusion that have characterized Indian macro affairs in the last several months. The resilience of the Indian stocks in the face of a series of happenings is as inexplicable as it is unsustainable.
In the rest of Asia, Bank Indonesia left its policy rate unchanged this week. Indonesia’s bank rate stands at 6.75%. Consensus expectations were not belied. We continue to treat the market with caution, notwithstanding its remarkable resilience and continued monetary policy and liquidity support to the market. The Bank for International Settlements (BIS) in its annual report highlights key emerging market nations that are seeing high credit growth reminiscent of credit growth in Ireland and Spain in the first half of the last decade. Indonesia was not listed there, but it should be. Further, Indonesia is high up on the list on the “Global Overheating Index” compiled by The Economist. Asian countries, including Hong Kong SAR, make up six of the top 10 overheating countries, according to this index. At least one country in that list is taking it seriously, it appears. The Bank of Thailand (BoT) met consensus expectations last week and raised the policy rate to 3.25%. Given the fiscal stimulus that the newly elected Thai government is planning, it was a wise decision on the part of BoT to take monetary policy insurance. They were also not swayed by global growth concerns. We like what we see in Thailand policy space. We remain very positive on Thai equities.
China released a slew of economic data last week. It is hard to make out a cogent story from all of that. Bare Talk has said it several times that China’s gross domestic product (GDP) numbers are difficult to analyse since no breakdown is published. The annual growth rate of 9.6% has deftly come in 10 basis points (bps) below the first quarter and 10 bps above the consensus estimate for the second quarter. Regional and China stocks have celebrated and we are scratching our heads.
Savour this news on Chinese housing transactions:
July 13 (Bloomberg)—China’s June housing transactions rose 31 per cent from May as homebuyers defied government curbs and developers posted gains from sales in smaller cities. The value of home sold last month increased to 499.2 billion yuan ($77 billion), compared with 380.9 billion yuan, based on first-half economic data provided by China’s statistics bureau today. Housing sales in the first half climbed 22 per cent to 2.1 trillion yuan from a year earlier, according to the data.
On top of this, China reported higher-than-expected consumer price and producer price inflation over the weekend. Pork prices have skyrocketed. Given this backdrop, strong GDP growth numbers should persuade investors to conclude that more monetary policy tightening was likely. That would set stock prices back. But we have a different reaction—one we are at a loss to explain.
The testimony by the US Federal Reserve chairman to the House Financial Services Committee has left the doors open for another round of quantitative easing or other equivalent measures, if economic conditions warranted. We should note here that the possibility of continued and/or further accommodative policy stance in the US coupled and a potentially similar policy in the euro zone are a lethal combination for inflation risk in the world. It raises the spectre of higher commodity prices and currency wars.
The question arises as to why the European Central Bank should pursue an accommodative monetary policy. After all, it raised its policy rate two weeks ago. If it wishes to preserve the single-currency project, it will have no option but to compete with the US on currency debasement. Greece and others not only need a bailout to dissolve their debt mountain, but they also need an economic stimulus in terms of wage cuts and/or a substantially weaker currency to prevent debt burdens from rising again. With European social compacts ruling out too much of a burden on the working class, the euro has to weaken a lot or the euro has to be consigned to the pages of history.
No surprises then that the price of gold is up at $1,590 per ounce and the price of Brent crude is at $117.0, not too far away from its recent peak, nullifying the recent attempt to release more crude oil into the market from the strategic oil reserves.
We reiterate our helplessness in decoding the note of cheer or resilience that has characterized global equity markets. Investors are behaving like the frogs that enjoy the warmth of the boiling water.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at baretalk@livemint.com
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First Published: Mon, Jul 18 2011. 11 51 PM IST