The doctor's diagnosis on the world economy...

Sep 26, 2011

In this issue:
» Is the IMF's US$ 384 bn war chest not enough?
» A currency crisis is upon us
» A US$ 0.5 fall in gas prices can inject US$ 70 bn into the US economy
» Is there no slowing India's consumption boom?
» ...and more!

Let's forget about Greece for the moment. Or even the US for that matter. What else is going wrong in the global economy that's causing global markets to head southwards so sharply? The S&P 500 is down almost 10% for the year. But, the BSE-Sensex is down over 20% year to date (YTD). China and Hong Kong are down 15% and 25% respectively. Is the sky falling on our heads, or is this a green signal to buy?

Well, the global economy is clearly in the midst of a slowdown, and we may be far from a recovery. So, what are the telltale signs of a slowdown? You can tell when water is boiling by seeing bubbles forming on its surface. In a similar way, when copper prices fall sharply it should set off warning bells in your mind. This commodity is often called Dr Copper for its ability to give a diagnosis on economic health. Copper has a variety of industrial uses and demand for the metal helps determine levels of economic activity. Copper wires go into various appliances, vehicles, construction of buildings etc. That is why, the 22% drop in copper prices this month is signaling a severe drop in manufacturing activity across the globe. And since China is the world's biggest consumer of this red metal, the dragon nation may very well be running out of steam. Growth is definitely on a downward trajectory in the country. Its property market is in the dumps and exports have also slowed.

Other signs are also showing that the brakes have been pressed on the global growth engine. Shares of steel, coal, mining, auto companies etc have been seeing selling pressure across the globe. Junk bonds have also been under the scanner, spelling trouble for companies saddled with debt. All these are troubling signs.

Emerging markets were earlier seen as global growth engines. They were supposed to be the cogs in the worldwide growth machine that would never tire or stop moving. But, these countries are not immune anymore. The sovereign debt crisis in Europe and America's stagnation has contaminated the entire world. "The world is now in a synchronised slowdown," says Mr El-Erian, the head of Pacific Investment Management, the world's biggest bondholder. Ominous though his words are, we have no choice but to believe them. But, while negative news is bad for the economy in the short term, it may be excellent for the long term prospects of your portfolio.

Do you think the world economy is in a sustained slowdown or is this just a temporary blip? Should this affect your investing decisions? Share your comments with us or post your views on our Facebook page.---------------------------------------------------------- Free Video ----------------------------------------------------------

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 Chart of the day
With US$ 1 trillion of infrastructure investments expected over the next five year plan (FY12-17), demand for steel in India is expected to see a spike. As today's chart of the day shows, steel demand is likely to jump by over 70% to 113 million tonnes (MT) by the end of the next Five-Year Plan. The Planning Commission has made this projection based on an expected GDP growth of 9%. The good news is that most of this demand is expected to be met by domestic steel producers. India's domestic steel producers are slated to add 40 MT of additional capacity during the 12th Plan.

Source: Business Standard

Even though the US government has failed to uplift the economy, the American citizens may just get the feel of a stimulus program. The credit goes to falling gasoline prices. The same is expected to have a trickledown effect on consumption in other sectors. The seemingly small drop of average unleaded gasoline prices from US$ 3.98 per gallon in May 2011 to US$ 3.51 per gallon is expected to add roughly US$ 70 bn to the US economy.

But is this something to rejoice? The fall is due to cut back in consumption on concerns of a lacklustre economy. If the fears don't materialize, the declining price trend will not continue. And if they do, lower gasoline prices that come along with job losses are hardly a reason to celebrate.

The global economy is yet again on tenterhooks. And with the situation so sensitive, it is not surprising that economies most vulnerable to another recessionary blow are taking a fresh look at the resources at their disposal. Not just that, IMF, the banker of last resort to the world, will also have to be ready with its war chest should the situation go out of hand. Sadly though, it seems as if its war chest is not big enough. At least this is what the recently coronated IMF Chief, Christine Lagarde seems to be hinting at.

The current war chest with the IMF totals US$ 384 bn. And while this looks good enough, Lagarde is of the view that this may pale in comparison with the potential financing needs of vulnerable countries and crisis bystanders. Fortunately though, the BRICS group of nations, an economic bloc that seems the most able to fund the IMF, has agreed to contribute to global financial stability.

It should be noted, however, that crises have this nasty habit of escalating far beyond any one's imagination and hence, resting assured that funding can be made available on call would be akin to playing with fire. One just can't rest easy.

Indian companies must be lamenting at their hard luck. Because of the high inflation in the country, the Reserve Bank of India (RBI) has resorted to a series of rate hikes, all of which made domestic debt expensive as interest costs surged. That is why many big Indian corporates tapped the overseas markets where funds were cheaper given that both the US and Europe had interest rates close to zero on account of recession. But the dramatic slide in the rupee recently could change all that. The rupee has depreciated by over 12% to Rs 50/US$ from around Rs 44/US$ at the beginning of August 2011. As a result of which those companies who have gone abroad for their borrowing needs are likely to take a hit of over US$ 2 bn this year.

Indian companies have borrowed close to US$ 21 bn in foreign currencies through ECB (external commercial borrowings) window between January and July this year, as against a total amount of US$ 18 bn in 2010. What has further compounded their woes is that the slide of the rupee has been so sudden that many of the companies have been caught on the wrong foot as they did not adequately hedge their positions. Things could go back to normal, if there is a dramatic appreciation in the rupee. But given the uncertainty that is currently prevailing in the global markets, whether the rupee will be able to erase its losses remains to be seen.

Talk about emerging markets being decoupled! If the currency crisis is anything to go by, the logic of emerging economies like India decoupling from the global crisis goes out of the window. True we may not be an export dependent economy like China. True our demographic virtues hold potential for economic empowerment in the longer term. But a runaway inflation can damage India's economic goals beyond repair. That is exactly what the depreciation of the rupee versus the US dollar is threatening to do!

As it is the spiraling commodity prices have left little breathing space for consumers over the past 12 to 15 months. In India, the RBI's hawkish policy stance has made liquidity tighter without bringing down inflation dramatically. In such a scenario if our imports, particularly of oil, become dearer, manufacturing and consumption are bound to take a big hit. The RBI and its peers in emerging markets will certainly intervene if the currency crisis prevails. But in the meanwhile the currency war is yet another risk that Indian markets will have to withstand in the near to medium term.

Come what may, there seems to be little stopping the great Indian consumption boom. The fact that retail chains across Indian are making a beeline for acquiring space is testimony to that. According to a senior personnel of a certain retail agency, the Future Group, Shoppers Stop and Reliance Retail have together scooped up more than 10 million sq ft of retail space recently. Another real estate advisor voices a similar optimism, saying that about nine major retail chains have planned to open at least 200 retail outlets across the country between 2011 and 2014. And guess what, the maximum action is happening in the non-metros. About 70% new mall is expected to come up in tier-2 and tier-3 markets. At present, India is the fifth largest retail market in the world and growing. In fact, if the government allows 51% foreign direct investment (FDI) in multi-brand retail, the Indian economy will draw a lot more investment in the future.

The Indian stock markets started the week in the red. At the time of writing, the benchmark BSE-Sensex was down by 300 points (1.9%). All sectoral indices were trading weak, with consumer durables and metal stocks bleeding the most. Red marks were seen across Asia as well. Indonesia was the biggest loser down by a huge 5.9% and Malaysia was next in line (down 3.7% from Friday's close).

 Today's investing mantra
"Individuals who cannot master their emotions are ill-suited to profit from the investment process." - Benjamin Graham

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5 Responses to "The doctor's diagnosis on the world economy..."


Sep 26, 2011

Definitely, the global economy is slowing down--looks like we are in for a long period of slow or low growth. witness the prices of crude,gold,commodities--all heading downhill. And wonder of wonders, contrary to all the experts, the dollar is not wekening--in fact it is strengthening day by day. Makes you wonder what all these experts are missing in their predictions-- or are they also just copying the leader? regds



Sep 26, 2011

This is just not a blip, but a serious downturn. Investors will have to be more than alert, as, now this is all a global market, and therefore a 24 hrs job. And with the political turmoil, things are really bad.

Regarding the BRIC countries "funding" IMF is like robbing the poor and funding the rich. Develop countries have just been spending monies and raising debts to be paid by the future generations and now they are not able to even service their debts. Even if IMF funds them, things are not going to improve. This is the begging bowl the politicians are carrying and seeking help. What exactly is the ground situation are not clear. The popn. of these countries are angry and protesting against these politicians and their policies. What we get to see the picture is what is dished out by the media, where they are covering the big shots, but the unemployed popn. is about to revolt. The PIGS will not be able to come out of these rut they have created, and it would be much better if these countries are allowed to default. Once for all the surgery should be carried out and than hope for the best.

We are in a much better stage, but than if we are not cautious, we would have much bigger problems.

Fluid situation, requires lots of thoughts, alertness, visionary leadership (sadly lacking). difficult times.



anupam garg

Sep 26, 2011

trust deficit is to be blamed... ppl have lost faith in BSE & NSE for some unknown reason, maybe because of the fear of global crash...such fear is justified but such lack of faith in Indian market is not

Human behavior has a big role to play in the current volatility...thr's no logic for sensex fallin by 100s of points daily or gold losing as much as 5%, whereas a ccy bound to doom called $ keeps apprecating


jayaram Madapulli

Sep 26, 2011

Good.. but all that said is obvious. If any expert lives on the earth who understand the root cause and can foresee with conviction the stock market direction, thats what the general public is interested!!


Naushad Patel

Sep 26, 2011

Temporary blip??

More like a slow death-spiral!!

This will now take many years to correct since the natural correction process is being blocked in every way by every governments political and financial institutions!!

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