Beginning of the end of American Economic Hegemony - implications for us in India

We are witnessing very interesting and extraordinary times these days when two of the un-thinkable and the un-imagined events happened . Both the events announced  the "Beginning of the End" of American Economic hegemony

 The first event was related to US debt ceiling crisis which brought US Govt.to the brink of default recently on August 2. Just hours before the deadline of potential default , the congress finally put its stamp on increasing the US Govt. debt ceiling from $14.3 Trillion by $2.1 Trillion. However, the damage to the US system credibility was already done due to the inability of the lawmakers and the poltical parties to rise above their narrow electoral interests and think bigger.

The other event happened yesterday(August 6th) when US lost its AAA rating for the first time since 1941 when S&P downgraded the AAA rating to AA+ rating with negative outlook. 2 days earlier , the Chinese credit rating agency(Dagong) had downgraded US rating too. Though this may spook the markets on monday(8th Aug) in short term , the effects would be felt more in the medium and long term when the Treasury yeilds will go up by 60-70 basis points leading to an additional Interest burden of $100 Billion for the US Govt , as per JP Morgan assessment.This is also going to impact the purchases of treasury bonds by countries like China which is the biggest creditor of US. 

Both the events led to abject humiliation of a nation which has been the prime driver of the world ecomomy for many decades and which has treated the world as its own backyard. Russian leader Putin rubbed salt to the wound by calling US a parasite to the world economy who lives beyond its means.

The long term implications of these events could be even more damaging with Dollar losing the status of the world reserve currency . The share of Dollars in world reserve currency has declined to 61% from about 75% few decades ago. These events along with the rising US debt(100% of GDP) will further exacerbate the decline. The only silver lining which will arrest this decline is the absence of any credible currency alternative with Europe and Japan having their own set of issues.

Lastly, the latest GDP data for the first half of 2011 has added to the American woes when US economy growth slid down to <1% which has raised genuine fears of US economy slow down or double dip recession.

Similarly, Eurupe , the other elephant in the room of the world economy has its own share of un-predictable problems in terms of the sovereign debts of economic rougues like Greece, Spain and Italy. If Italy goes berserk , all the surplus money which Europe has also won't be able to help.

What does this mean for emerging markets like India , China, Brazil etc?

Well, there are short term as well as long term implications. In short term (for next some months), this will lead to some pain in the emerging economies as well as markets with US and Europe potentially slowing down or having some soverign debt related shocks. However , in medium and long term , this is going to be good for internally robust and growing economies like India and China as foreign funds(FII) will start coming in droves to economies like India who are the only oasis of ecomomic stability and growth during these troublesome times

Bottomline is that all these events are in line with the credible economic forecasts which I had earlier talked about(in my earlier articles on Indian economy growth story) when in next 30-40 years , India and China will emerge as the dominating economic forces while US and Europe will take secondary roles.

Million dollar question is that what does it mean for retail investors like us in India?

My vote is that keep believing in long term Indian growth story and keep investing in fundamentally strong businesses with quality management teams with a long term perspective.The prices are very attractive for even the best businesses with durable competitive advantages. I had talked about 3 businesses in my earlier articles(PFC, LIC Housing Finance and Bank of Baroda). Now is the time not to dump fundamentally strong stocks like these but to buy more of them at every fall in prices as you reduce your average cost of purchase. I am going to mention one more business/ company today(BHEL) in the next article which is also a very sound value investment.

Medium term - Indian market should start moving positively within next 6 months due to positive domestic factors(till we dont get big economic shocks in the global arena). Inflation should start moderating due to normal monsoon and crude prices have fallen to less than $90. Interest rate rise cycle is nearing its end and we should not see more than 0.25% upward revision for the year. Most of the bad news is already priced in the market(except black swan economic events/ shocks in the Global arena). Policy and reform paralysis of the Govt is showing some signs of activity with the Govt. trying to bring some key economic bills in the monsoon season.

Hence from both medium term and long term , we should see good gains if we are careful in our business selection(using the Hi-Five principles of value investing I mentioned in one of my earlier articles in July) and invest with every fall in prices . Invest with 3-5 years horizon as the prices are attractive which will ensure good "margin of safety".

Last but not the least , Warren said " Be greedy when everybody is fearful and be fearful when everybody is greedy" . Now is the time to be greedy "selectively" and not be fearful

Happy reading and investing