In the current era of globalisation, it is not possible for any economy in the world to function in isolation which also makes them capable of driving changes in other economies of the world. In 2008, US economic crisis turned into the Global Economic Crisis which was led by low interest rate over several years and the subsequent crash in the real estate market. Experts explained the situation as – ‘US sneezes, world catches cold’. Therefore, it is imperative that we read and analyse global cues to assess economic condition of a country.
Currently, US is again experiencing low interest rates and while investors are sceptic about investing in the equity market, stock pricing continue to climb. The World Bank has reiterated the statement by saying that current policies of US are pushing it towards economic crisis similar to that of in 2008. Furthermore, emerging markets such as India, China and Pakistan, among others are expected to be worst hit.
From the trade perspective, one of the biggest driving forces for investment decisions in US is the current political administration of the country. Under President Donald Trump, the country has taken steps against other economies such as China and European Union who are playing ‘unfair’ on trade levels. This is pushing US towards adopting protectionism measures which could lead to drop in global trade levels. This trade war among world economies is also disturbing the stock markets.
However, it must that noted that with the ongoing trade war between US and China, investors who seeks to invest in Asian markets will now prefer India over China, which improves prospects for the Indian markets.
Currently, the rally in US stock markets is led by positive sentiment with big internet and technology stocks driving the upward movement (Apple Inc breached $ 1 trillion in valuation). This has caused renewed enthusiasm amid economic tension due to turmoil in Turkey and concerns that bull-market is in the final stages. But there are signs of weakness too, as we see bearish concerns in the market.
Market pundits believe that such weakness in the stocks market can setup a chain reaction which may lead to market selloff in the following months, a condition synonymous with the global economic crisis of 2008. Experts have described the current situation as to that of exhaustion with only a few stocks driving the market rally and market correction that could taper the top 10% of the recent gains.
Following the Lehman Brothers debacle in 2008, one of the biggest changes in the stock market was investors shifting to value stocks from growth stocks. Though growth stocks offer better upside but if investors want to be risk-averse ahead of a market correction, they view value stocks as a better market bet.
In addition, the US Federal Reserve can also be attributed as one of the biggest driving forces for the stocks market. Fed Reserve is moving towards raising interest rates which could reverse the market rally which is led by low rates and the Fed Reserve’s bond-buying programme. Therefore, the market rally is not reflected in the corporate earnings of the companies.
Furthermore, rising interest rates have also contributed to fear about rising inflation which can cause further correction in the market. It must be noted that a bull-run in the market does not last forever and every market has to go through cyclical changes. The Indian equity market too has matured by leaps and bounds over the last decade to handle global shocks. Political changes in India since 2014 and subsequent economic growth of the country have led investors to maintain a long-term view in the stock market.
Not just domestic but Foreign Institutional Investors (FIIs) have also placed greater faith in the Indian growth story. As a market matures, volatility reduces and investors play on strong market cues rather than speculation. Securitise Exchange Board of India has also rolled out policies to safeguard the interest of domestics and as well as foreign investors.
The positive sentiment in Indian market will continue unperturbed by the stock market correction in US. More than global economic conditions, the US stocks prices were more responsive to the monetary policy by the Fed Reserve. This may have distorted the broader view of the economy (corporate earnings and economic growth).
Since the global economic crisis of 2008, the last 10 years have helped the Indian economy develop more resilience to unforeseen blows in world markets. Additionally, the Reserve Bank of India is also keeping a close watch on the inflation levels and economic conditions and adjusting the repo rate accordingly. In the current scenario, regulatory bodies in India (RBI and SEBI) are better placed to tackle tough economic conditions and minimise market volatility.
I also believe that the emerging economies are better equipped to tackle economic situation before they led to an economic meltdown. Following the global economic crisis of 2008, markets across the world have taken a lesson that they need to build on strong fundamentals in order to protect themselves against international crisis. Though a tough economic condition is eminent in the US market, it is unlikely that India will suffer the brunt this time because over the last decade India has made efforts to remain protected against such economic crisis.
No comments:
Post a Comment