What investors need to see

What investors need to see
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First Published: Mon, Apr 21 2008. 10 53 PM IST

Illustration: Jayachandran/ Mint
Illustration: Jayachandran/ Mint
Updated: Mon, Apr 21 2008. 10 53 PM IST
Ever since news of the credit crunch first hit the headlines, dire warnings have been issued about the crisis being the worst since World War II, with some asserting that it’s the worst since the Great Depression. But, while there’s little doubt that banks in developed countries have been badly affected, taking billions of dollars in write-downs, there seems to be a disconnect between the stock market and the credit markets.
Illustration: Jayachandran/ Mint
The US stock market, in particular, seems to have weathered the storm with comparatively little damage. During the last US recession, the Dow Jones Industrial Average had fallen 19% between January and October 2000. This time, it fell by 10%. But, stocks in India have fallen much more and analysts have pointed to the apparent contradiction in the US markets—at the epicentre of the crisis—doing well, while markets in economies with much higher growth, such as India and China, do badly.
There are several explanations. The most obvious one is that valuations are much higher for the Indian market —the US did not see the kind of explosive growth seen in Indian stocks in the last few years. Another belief is that the US Fed Reserve has been very proactive this time, which will limit the downside to the US economy and temper the slowdown.
A look at the earnings of US companies shows many of them doing rather well. This is because of high overseas sales and a weaker dollar. For instance, despite the US slowdown, the Chinese economy grew 10.6% in the first quarter of 2008, which, although lower than the 11.2% expansion in the final quarter of 2007, isn’t much of a slowdown. With China and other emerging markets contributing far more to global growth than the US, it’s not really a surprise that commodity prices continue to soar. True, if the US goes into a really deep recession, every economy will be affected. But the world today is very different from the one in 2000.
In short, at present the credit crisis in the West is being counterbalanced by high growth in many emerging markets, which accounts for both high commodity prices as well as the buoyancy in the US stock market. As the International Monetary Fund has pointed out, while there may not be a decoupling, there are signs of divergence in the global economy. The hope for emerging markets is that global investors will realize that they should invest directly in overseas firms rather than in US companies with overseas operations.
Is there hope for emerging markets? Write to us at views@livemint.com
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First Published: Mon, Apr 21 2008. 10 53 PM IST