The first world consisting of developed nations - US and west Europe - are at the cusp of recession again . This time not due to recklessness and greed of private sector (mortgage companies and investment banks) but due to profligacy and extravagence of the goverments. Unthinkables like developed and rich nation governments teethering at the edge of bankrupties are happening these days. These are interesting times for everybody as these changes herald the beginning of the new pecking order when the economic power of the developed world is waning and that of new emerging economies is surging.
As we speak , Greek govt. could be at the edge of default again just after a year of being bailed out by European Union. The yield of 2 year Greek govt. bonds shot up to a new peak of 57% as Euro-zone threatened to stop the next installment of emergency loans this month if Greece doesn't meet the conditions set for these loans. Next 2 months-Sep and October- would be critical for survival of Greece. Any Greek default could have have a snowballing or contagion impact on other european nations at similar brink of debt crisis like Spain and Italy. Lately Italy, one of the G-7 nations has surprised the market by its debt woes as it struggles to service its $3 Trillion debt(>150% of GDP).Even France would be hit very badly as the leading French banks like BNP Paribas and Societie Generale have huge exposure to Greek bonds and Greek banks. All these nations including Greece are too big to fail because of the contagion effect. The future of Euro and European Union is at a big risk with a good chance of weaker southern european economies like Greece, spain, Portugal and Italy shown the door on Euro.
US has its own set of economic woes which is not showing any signs of abating. S&P recently cut its debt ratings to AA+ from AAA which led to a market shock. The enonomic growth in the last quarter(Q2 of 2011) was almost zero at 0.3% and payroll/ employment generation in August was almost nil . Some of leading economic indicators like ISM's(Institute of Supply Management)manufacturing and production index showed that these sectors were is at the edge of contracting. Conference board's Consumer confidence index has plummeted to the lowest level after April 2009 levels which is bad for a consumtion driven nation. Obama proposed a spirited $450 billion job creation plan.However,the impact of the same would not be seen till mid 2012
These two risks - slowing US economy and Euro zone debt crisis are the two biggest ones which could lead to world economy going into a double dip recession again.
Whats the implication for Indian economy and Indian market?
Well, its short term pain and long term gain. Lets understand how?
Indian economy is unfortunately not isolated from the shock impacts of the potential recession or debt crisis of the developed world . Its primarily because of two reasons . 15% of India GDP is still tied up to exports- IT, Textiles, Gems and jewellary etc. Secondly , FIIs who have become the biggest players in the stock market become jittery and risk averse when we have any world crisis and start shifting their funds into safe havens like dollar or Gold. This could lead to short term shocks in Indian markets when market could go further down.
However, in medium and long term(within 6 to 9 months), Indian markets should show a robust rise again as no other economy(except China) is showing such a steady growth of 8% in these conditions too. Good news about India is that inflation should come down by Nov-Dec due to food prices coming down after a good monsoon and commodity/ oil prices coming down due to global slowdown. Govt seems to be awakening from Policy and reform paralysis as its is trying to shove a few key economic bills through the monsoon session. The interest rate increase cycle has almost come to end with RBI not set to increase the interest rates by more than 0.25% this year. Most of the domestic bad news of inflation and interest rates have already been baked in the current stock prices. All these good news coupled with the fact that there are not too many options(fast and steadily growing economies like India)will pull back the FIIs towards India in medium and long term.
Whats does it mean for Indian retail investors??
In short term(next 3-4 months), market is definitely going to get worse (due to unfolding global events in Europe) before it gets better .Hence , keep some funds(10-20%) in cash or other liquid investments like Gold ETFs over the next few months so that you could buy selective stocks at every dip, using those funds . Investing 10% of your portfolio into Gold ETFs(exchange Trading Funds) which are mutual funds tracking to the price of gold and very liquid, would be a wise idea as Gold is considered as safe haven in times of uncertainty and hence shows steady appreciation.
As we speak , Greek govt. could be at the edge of default again just after a year of being bailed out by European Union. The yield of 2 year Greek govt. bonds shot up to a new peak of 57% as Euro-zone threatened to stop the next installment of emergency loans this month if Greece doesn't meet the conditions set for these loans. Next 2 months-Sep and October- would be critical for survival of Greece. Any Greek default could have have a snowballing or contagion impact on other european nations at similar brink of debt crisis like Spain and Italy. Lately Italy, one of the G-7 nations has surprised the market by its debt woes as it struggles to service its $3 Trillion debt(>150% of GDP).Even France would be hit very badly as the leading French banks like BNP Paribas and Societie Generale have huge exposure to Greek bonds and Greek banks. All these nations including Greece are too big to fail because of the contagion effect. The future of Euro and European Union is at a big risk with a good chance of weaker southern european economies like Greece, spain, Portugal and Italy shown the door on Euro.
US has its own set of economic woes which is not showing any signs of abating. S&P recently cut its debt ratings to AA+ from AAA which led to a market shock. The enonomic growth in the last quarter(Q2 of 2011) was almost zero at 0.3% and payroll/ employment generation in August was almost nil . Some of leading economic indicators like ISM's(Institute of Supply Management)manufacturing and production index showed that these sectors were is at the edge of contracting. Conference board's Consumer confidence index has plummeted to the lowest level after April 2009 levels which is bad for a consumtion driven nation. Obama proposed a spirited $450 billion job creation plan.However,the impact of the same would not be seen till mid 2012
These two risks - slowing US economy and Euro zone debt crisis are the two biggest ones which could lead to world economy going into a double dip recession again.
Whats the implication for Indian economy and Indian market?
Well, its short term pain and long term gain. Lets understand how?
Indian economy is unfortunately not isolated from the shock impacts of the potential recession or debt crisis of the developed world . Its primarily because of two reasons . 15% of India GDP is still tied up to exports- IT, Textiles, Gems and jewellary etc. Secondly , FIIs who have become the biggest players in the stock market become jittery and risk averse when we have any world crisis and start shifting their funds into safe havens like dollar or Gold. This could lead to short term shocks in Indian markets when market could go further down.
However, in medium and long term(within 6 to 9 months), Indian markets should show a robust rise again as no other economy(except China) is showing such a steady growth of 8% in these conditions too. Good news about India is that inflation should come down by Nov-Dec due to food prices coming down after a good monsoon and commodity/ oil prices coming down due to global slowdown. Govt seems to be awakening from Policy and reform paralysis as its is trying to shove a few key economic bills through the monsoon session. The interest rate increase cycle has almost come to end with RBI not set to increase the interest rates by more than 0.25% this year. Most of the domestic bad news of inflation and interest rates have already been baked in the current stock prices. All these good news coupled with the fact that there are not too many options(fast and steadily growing economies like India)will pull back the FIIs towards India in medium and long term.
Whats does it mean for Indian retail investors??
In short term(next 3-4 months), market is definitely going to get worse (due to unfolding global events in Europe) before it gets better .Hence , keep some funds(10-20%) in cash or other liquid investments like Gold ETFs over the next few months so that you could buy selective stocks at every dip, using those funds . Investing 10% of your portfolio into Gold ETFs(exchange Trading Funds) which are mutual funds tracking to the price of gold and very liquid, would be a wise idea as Gold is considered as safe haven in times of uncertainty and hence shows steady appreciation.
In medium and long run , we should continue to be very bullish about Indian economy and Indian stock markets. This is an opportunity to buy fundamentally strong businesses with sustainable competive advantage with competent management as most of the quality stocks are available at attractive prices. Buy in installments at every dip over the next few months .Invest with 3-5 years horizon as the prices are attractive which will ensure good "margin of safety".
Reminding again what Warren said " Be greedy when everybody is fearful and be fearful when everybody is greedy". Be selectively greedy over the next few months.
Happy investing
