This can blow big bubbles in emerging markets
In this issue:
» 100 m more to be added to India's poverty list
» EU announces US$ 1 trillion 'shock and awe' package
» India's GFP growth pegged at 8-9% over next 2 years
» US housing market is not getting any better
» ...and more!
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The interesting thing to note here as elucidated in the Economist is that many governments have had experience in tackling excessive price increases in the past couple of decades. But deflation (a scenario of depressed prices) has been much harder to deal with. Classic example in this case is that of Japan. Not just that, deflation in the developed world is also increasing the risk of bubble formation in the emerging markets. As most of the US and Europe are sticking to lower interest rates, investor money is being channelled into emerging economies for better returns. This has fuelled asset bubbles in many of these economies. In this case, China is a classic example. Already property and stock prices in the dragon nation have run way ahead of fundamentals.
Deflation in the rich world is also impacting India. Ever since India started showing visible signs of recovery, foreign investors have been pumping money into Indian equities. And they have been doing it at a faster pace. This has caused valuations of many companies to look rather rich. What is more, abundant liquidity in the system also means that inflationary pressures loom large. This means that in an increasingly globalised world, even stronger emerging countries could find it harder to keep their economies stable if deflation continues to persist elsewhere. The most obvious solution is to tighten monetary policy. India has already started doing that. But in the longer term, a close watch will have to be kept on how the rich world manages to pull itself out of the slump.
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But more importantly, central bankers seem to have lost control over the money that they are printing with stimulus packages being announced by the dozen. Plus, there are concerns with respect to inflation, oil and bad politics. To all of this, one more worry has been added in the form of the worsening debt crisis in Europe. As a result, stockmarkets in India have been pretty directionless in the past couple of months. But despite these hiccups, Ajit still sees value in Indian stocks provided one is careful about the stocks that are picked and who they are purchased from.
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A business daily reports that World Bank has pegged India's growth at 8% to 9% over the next two years. The growth in private demand is the basic premise for this projection. Sufficient liquidity in the banking system is also seen as a comfort factor despite lower credit growth. Volatility in capital inflows and inflation shocks could however play spoilsport.
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But the question is whether we really need a reworking of the old definition. What about the fact that we have not been able to do enough justice to the people already there on the poverty list? Thanks to massive loopholes in the system, a fraction of what is intended for the poor reaches it. Thus, without improving the efficiency of its existing welfare programs, precious little will be achieved by bringing more poor people on its rolls. Sadly, this is only going to lead to more robbing of taxpayer Peter to pay poor Paul.
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04:56 | Today's investing mantra |
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2 Responses to "This can blow big bubbles in emerging markets"
sethuraman
Jun 8, 2010If more people are added to the POOR category ,the politicians would be the happiest lot..next lot would be programme implementing officials..they would have more in the Aid kitty toswindle!!!..that is india..
Ravendra Prakash
Jun 8, 2010Today's write-up is intelligent & informative. By putting evolving events in proper perspective it makes for sound understanding of the situation.