Markets seem to have embarked on a process of discounting recession in the Developed world and lower growth rates in the Emerging markets. Globally, stocks entered a bear-market due to the more than 20 percent fall due to a combination of worries related to the sovereign debt crisis and slowing growth in most parts of the world. These worries are likely to plague the world economy for the next few months, if not more. Unlike 2008, emerging markets like India are unlikely to be insulated from the crisis.
While Greece has gained headline attention, the stress in the bond markets and currency markets is becoming more pronounced – a trend that is unlikely to change in the next 1-2 months. The growing currency volatility will invariably hurt growth prospects of emerging markets, especially countries like India. Most of the Asian currencies have suffered their biggest drop since at least 1998. This will lead to intervention by the Asian Central Banks but it will only add to the volatility thereby aggravating the problems that already exist.
The growing probability of a Greek Default has led to increased nervousness among investors and these concerns are likely to be accentuated over the next 2 months, unless the World grants yet another bailout as Greece has clearly stated that it has cash that will last only till end-October 2011. The recent volatility should make a Greek bailout very likely in the next few weeks. Investors should watch the role of Central Banks because the recent events have increased the probability of a coordinated intervention and provision of new stimulus a foregone conclusion. While the recently concluded US Federal Reserve Meeting may have belied expectations, the recent fall in all the assets markets (except the US Treasuries but including Gold) means that the US Fed will aggressively increase stimulus in its November meeting. But, these interventions are likely to follow only bouts of panic that will grip the world in the next 1-2 months.
The present global panic will invariably hurt growth in India for a variety of reasons, but this may not be the right time to panic (in the short-term) about the Indian economy. It is almost certain that India will not be able to reach its 8% growth target due to a combination of slowing world economy including Chinese economy and the high interest rates. In fact, India should consider itself lucky if it gets 7-7.5% growth this fiscal (2011-12). The present high interest rates will certainly temper consumer demand, especially for high value items. However, global problems make it almost a certainty that the interest rate cycle has peaked. It is likely that the RBI will reduce CRR before the end of the year due to a falling global commodity prices, especially Oil and even food grains over the short-term. The falling global commodity prices will provide succour to the country and its consumers but not to companies, as most of the companies are likely to have hedged their needs at a higher price. This would mean that corporate profitability will be hit at least in the next 3-6 months period thereby leading to lower estimates for stocks.
While Greece has gained headline attention, the stress in the bond markets and currency markets is becoming more pronounced – a trend that is unlikely to change in the next 1-2 months. The growing currency volatility will invariably hurt growth prospects of emerging markets, especially countries like India. Most of the Asian currencies have suffered their biggest drop since at least 1998. This will lead to intervention by the Asian Central Banks but it will only add to the volatility thereby aggravating the problems that already exist.
The growing probability of a Greek Default has led to increased nervousness among investors and these concerns are likely to be accentuated over the next 2 months, unless the World grants yet another bailout as Greece has clearly stated that it has cash that will last only till end-October 2011. The recent volatility should make a Greek bailout very likely in the next few weeks. Investors should watch the role of Central Banks because the recent events have increased the probability of a coordinated intervention and provision of new stimulus a foregone conclusion. While the recently concluded US Federal Reserve Meeting may have belied expectations, the recent fall in all the assets markets (except the US Treasuries but including Gold) means that the US Fed will aggressively increase stimulus in its November meeting. But, these interventions are likely to follow only bouts of panic that will grip the world in the next 1-2 months.
The present global panic will invariably hurt growth in India for a variety of reasons, but this may not be the right time to panic (in the short-term) about the Indian economy. It is almost certain that India will not be able to reach its 8% growth target due to a combination of slowing world economy including Chinese economy and the high interest rates. In fact, India should consider itself lucky if it gets 7-7.5% growth this fiscal (2011-12). The present high interest rates will certainly temper consumer demand, especially for high value items. However, global problems make it almost a certainty that the interest rate cycle has peaked. It is likely that the RBI will reduce CRR before the end of the year due to a falling global commodity prices, especially Oil and even food grains over the short-term. The falling global commodity prices will provide succour to the country and its consumers but not to companies, as most of the companies are likely to have hedged their needs at a higher price. This would mean that corporate profitability will be hit at least in the next 3-6 months period thereby leading to lower estimates for stocks.
