Who's next after 'Great Fall of China'?

Aug 28, 2015

In this issue:
» Global stock market crashes over the years
» Smart cities initiative makes progress
» Domestic pharma sees rising woes
» ...and more!


Many unpleasant words begin with the letter D. Death, disease, depression, debt, deflation... "Decoupling", on the other hand, has a nice ring to it. Economists certainly seem to love saying it.

Remember "de-coupling"? Don't blame yourself if you don't. You may have heard it last in 2008 or 2013. The word shows up prominently in news and blogs every time there is a major market crash. So as markets across the world catch the Chinese fever, be prepared to hear economists, central banks and your broker to tell you to think about decoupling. But this time is different. No, really.

The last time you heard of decoupling, it was in context of the US. Haven't you heard this saying? "When America sneezes, the whole world catches a cold."

Well, everyone said so when the US economy succumbed to the subprime crisis in 2008. At that time, the US Fed kept moving interest rates to zero. And the excess liquidity kept finding its way to the supposedly decoupled economies. Investors poured money into emerging markets, hoping that they would decouple from the crisis in the US.

Economists repeated the 'decoupling mantra' in 2013.

But this time it's not the US but China that is sneezing. And whether decoupled or not, every economy, even the US, is catching fever!

China's slowdown has understandably impacted global markets. This at a time when its currency is competing hard with the US dollar. Not to forget, as a major producer and consumer of commodities, China has the biggest influence on commodity prices.

In the Chinese context, therefore, decoupling is no longer a respite. China has close economic ties with both developed and emerging economies. Plus, neither are the emerging nor the developed markets decoupled from the commodity crash. Nor will China's slowdown leave global GDP growth intact. And the extent and pace of China's fall is instead up for debate.

As an investor, it is impossible to predict such trends. By now, though, you also have enough proof to discard the decoupling theory. So all you are left to do is to watch out for what happens after "the great fall of China".

As we saw in 2009 and 2013, global economic shivers aren't necessarily bad for investors. The market crash may offer opportunities to buy a few stocks you've always wanted. But don't stop at that.

Remember, the economies are as strong as their weakest links. And as economies succumb to their weakest links, they pass on the growth opportunity to those who can capitalize on it. For the US, the weakest link was its poor credit history. For China it has been an overdependence on cheap labour and currency.

Watch out for trends in manufacturing and credit that will reveal companies set to capitalise on the US and China's weaknesses.

And do not forget to price in India's weakest link (the government's performance) when you look to invest for the long term.

Which opportunities and risks are you looking at in the aftermath of the market crash? Let us know your comments or share your views in the Equitymaster Club.

P.S. Want to know how to 'Crash Proof' your portfolio?

We believe we have found "5 Warning Signals" or "5 Red Flags" that show up in a business right before its stock price plummets.

In fact, ensuring that you're not investing in businesses which show these "5 Warning Signals" could potentially be the difference between creating wealth and incurring losses with your stock market investments.

Read more about it here

--- Advertisement ---
The Best Stock Market Guidance You Could Get Right Now!

The stock market slide has made many investors wary and worried.

But there are some investors who were actually on the lookout for an opportunity just like this.

Because they knew it could lead to big profits... if the investments are made according to a specific plan.

What plan are we talking about exactly?

Click here for full details...

 Chart of the day
The gravity of the recent market correction in China can be put into perspective by comparing it to the crashes since 1929. While the extent of the fall is meaningful, one can safely conclude that this may not be the end of the bloodbath in Chinese markets. As poor economic fundamentals and asset bubbles in China continue to unravel, the economy could see more fund outflows. And the impact of the same will continue to be seen in markets the world over.

So besides currency wars, interest rate volatility and commodity rout, indices will remain vulnerable to economic data from China in the coming months. None of these macro scenarios should change your investment strategy. However, do ensure that you pick your investments carefully.

Pecking order of global stock market crashes

Back home, the ambitious '100 Smart Cities' plan seems to be finally chugging along. Now, if you could recollect, we had discussion on Smart Cities as one important Megatrend at the Equitymaster Conference 2015. Megatrends is the principal driving force behind The India Letter. And the creation of smart cities is the perfect recipe not only to create well connected business centres but to spur economic growth through better employment opportunities.

The government has released the list of 98 cities that constitute 35% of the urban population and have been earmarked for development under its Smart Cities mission. Among them, the states of Uttar Pradesh, Tamil Nadu and Maharashtra will be developing 10 or more number of smart cities. Under the plan, the Centre would be initially providing Rs 20 m to each of the smart cities for laying down the plan. In the next stage, 20 cities will be selected in each of this year and over the next two years to receive the government funding of Rs 5 bn spread over five years. Apart from this, the government would also be providing Rs 3 trillion for various urban initiatives.

But the real success of these initiatives will depend upon investments of similar scale being made by States, civic bodies and private players. However, challenges remain as the private sector is still not out of the woods and the local civic bodies are constrained by their limited financial strength and capacity to execute such large projects. No doubt the smart cities initiative can be a turning point to jumpstart the economy but the key lies in ironing out the hiccups in its execution. Therefore, while we would be closely monitoring this important Megatrend, we certainly would avoid being overtly enthusiastic unless there is a clear plan to overcome the teething problems.

Talking about Megatrends, the Indian pharma industry could witness some challenges to its growth. There was a time when many Indian pharma companies, built their fortunes in the largest generic market in US after expiry of blockbuster drugs. But the dynamics changed gradually, which have not been in favour of these pharma companies. Along with the competition intensifying, the companies also started facing compliance issues and lower number of approvals. Not to say a number of manufacturing facilities have also been pulled up for not complying with USFDA norms.

Things do not seem to end here. Since some time, there is a rising trend of consolidation in the US distribution system which is changing the competitive landscape of the market in US. As a result, this is impacting the bargaining power of the drug companies, as the lower bidder takes the pie. Consequently, generic prices of various drugs have been declining since some time. Such challenges are expected to continue for the pharma players. However the companies which will be able to offer niche drugs, where not many companies are present will be able to remain ahead of their peers.

The Indian stock markets opened the day on a strong footing and continued to soar higher during the course of the day. At the time of writing, the BSE-Sensex was trading higher by 346 points (up 1.3%). Power & IT stocks are leading the gainers today.

 Today's investing mantra
"Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Madhu Gupta (Research Analyst).

Today's Premium Edition.

Do these beaten down commodity players warrant a closer look?

With a bunch of businesses from this space trading below their book values, how should you go about deciding which one to pursue?
Read On...Get Access

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Who's next after 'Great Fall of China'?". Click here!

3 Responses to "Who's next after 'Great Fall of China'?"


Aug 29, 2015

One of the best pieces of article I have seen covering metal stocks- Very analytical, purely databased. Some of your research teams recommended certain stocks which come low in the list and they are languishing.They could have used this database of 10 years spread over different cycles.



Aug 29, 2015

Decoupling among the Economies of Nations at present context is anyway not happening. You have rightly said that it is the weakest link in Economic performance of a nation that cautions for risks.AS having good economic fundamentals India may never be an epicenter for such crashes that occurred in US or recently in China. I believe the setback that set in stock market would settle by the end of September 2015.



Aug 29, 2015

A C ? E
2015 CHINA

Equitymaster requests your view! Post a comment on "Who's next after 'Great Fall of China'?". Click here!
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

There are no outstanding litigations against the Company, it subsidiaries and its Directors.

For the terms and conditions for research reports click here.

Details of Associates are available here.

  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report.
  2. Equitymaster has financial interest in SAIL, MOIL and ONGC.
  3. Equitymaster’s investment in the subject company is as per the guidelines prescribed by the Board of Directors of the Company. The investment is however made solely for building track record of its services.
  4. Equitymaster's Associates and Research Analyst or his/her relative doesn't have any financial interest in the subject company.
  5. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  6. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.