Panic hit stock markets across the world on Monday, as the weekend saw the nationalization of Belgian bank Fortis NV, the government takeover of another British bank, a bail-out of Germany’s second largest commercial property lender and yet another nationalization of a bank in Iceland.

The rot has clearly spread far and wide in Europe and nobody knows how many more skeletons are going to tumble out of bank cupboards. Add to that the watered-down, emasculated and politically motivated version of TARP (troubled asset rehabilitation programme—the US bailout plan) that looks to be passed by the US legislature and rumours of more banks teetering on the brink in the US.

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The upshot of all this has been distress selling in equity markets as banks deleverage themselves. Note that European banks are even more leveraged than US banks, with reports pointing out that Fortis’ leverage was as high as 60:1. That would mean the unwinding by these banks will be even greater.

The Indian market has now given up all the gains it had made as a result of the falling price of crude. Interestingly, despite the 28% or so fall in the price of international price of crude since mid-July, the dollar has appreciated by around 9% against the rupee since then, thanks to continuous selling by foreign institutional investors and on account of the dollar strengthening against most currencies.

The US dollar index against major currencies hardened from a low of 70.03 in mid-July to 74.2 on 26 September.

What is the risk of a sudden reversal of financial flows among countries in Asia? Citi Investment Research has done the math, computing an external vulnerability indicator by: (1) adding up a country’s stocks and local bonds held by foreign investors and short-term debts; and (2) dividing that number by the existing stock of foreign exchange reserves.

This vulnerability indicator is as high as 237% for Indonesia and 208% for South Korea, 97% for the Philippines, 88% for Taiwan, 71% for Malaysia and 59% for India. At the other end, China’s vulnerability indicator is as low as 16%. Sums up the Citigroup report: “Indonesia and Korea stand out from the crowd as the most vulnerable economies in case of sudden reversal of financial flows. They are followed by the Philippines, Taiwan and Malaysia. Should the US financial crisis continue to deteriorate, currencies of these economies could suffer seriously. Meanwhile, China and Vietnam look relatively safer, as they rely a lot less on external mobile capital than their neighbours."

Unfortunately, that hasn’t prevented the rupee from being one of the worst affected currencies in Asia this year.

Also, the credit crisis is certain to have repercussions on the European economy. And with the US and Europe weakening in tandem, the risks to China’s export-driven economy are increasing. At the World Economic Forum in Tianjin in China, Stephen Roach, chief economist at Morgan Stanley, said that Chinese growth could slow to 8% from the current level of 10%.

If that happens, a lot of Asian economies will be hurt, as will commodity prices. A Reuters report on Monday pointed out Chinese buyers of Indian iron ore are defaulting on import contracts and refusing to lift the ore unless the seller offers a discount on contracted prices. India cannot remain immune to such a global slowdown.

The BSE Sensex touched a new 2008 low on Monday, beating the 16 July lows, but it’s interesting to notice the changes in the market since mid-July. Among the BSE indices, the biggest loser since 16 July has been the BSE Metals index, which is down 23.4%, reflecting the fall in commodity prices as global growth cools. Next in line is the BSE Realty index, down 19.2%, as the market worries about the impact of falling real estate prices and higher interest rates on these companies. IT stocks are next in line, having fallen 14.3% since 16 July, a direct fallout of the meltdown among US and now European banks. The BSE Power index is marginally positive, as is the capital goods index.

The big gainers have been the defensive fast moving consumer goods (FMCG) index, up 14.9% since 16 July, and the BSE Bankex, up 14.3%, despite the lagging ICICI Bank Ltd stock. The index for the other defensive sector, health care, is down 8.1%, primarily due to Ranbaxy Laboratories Ltd.

Looking ahead, with the shrinking of global liquidity, the banking sector is unlikely to outperform—State Bank of India’s recent decision to hike deposit rates is an indication that liquidity continues to be tight, partly due to Reserve Bank of India’s rupee-supporting operations.

As for the FMCG sector, it’s worth noting that it now has a trailing price-earnings multiple of 25.24, not cheap by any measure. There is no place to hide.

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