Why are the markets panicking now? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Why are the markets panicking now? 

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In this issue:
» What does the gold price crash mean?
» How does a falling rupee impact consumers & corporates?
» India is failing to create jobs
» Is China headed the US way?
» ...and more!


00:00
 
There has been extreme volatility in global financial markets in recent times. In fact, the last couple of days have witnessed a massive sell-off across the globe. Stock markets across Asia, Europe and America have tumbled. Gold prices have fallen sharply. And so has been the fate of bonds.

What is the reason for this sudden panic?

The main trigger has been Ben Bernanke's recent speech where he hinted about a likely tapering of its quantitative easing program. Apparently, the US central bank has grown optimistic about an economic recovery in the US.

Let us ask you a couple of questions. Shouldn't the prospect of an economic recovery be good news? Doesn't it mean better growth and earnings? And shouldn't stock prices be driven by earnings? The sad truth is the world stock markets have become increasingly disconnected from real fundamentals.

Central bankers in developed economies had resorted to a massive money printing spree. But the liquidity that was meant to prop up the economy found its way into risky financial assets. Effectively, the global stock market rally was fuelled by nothing but cheap liquidity alone. So now when there is a probable threat of liquidity getting squeezed, investors have pressed the panic button.

All this while, weren't global investors riding the proverbial tiger? Weren't the high risks involved quite apparent? We, at Equitymaster, have been highlighting about the high risks in the global economy for a while now. So we are not at all surprised by the current global meltdown. It was pretty inevitable.

In fact, taking into account the extreme risks in the global as well as the domestic economy, we have maintained a very selective and cautious approach to stock picking. For a while, we even refrained from giving outright 'Buy' recommendations. We kept reiterating that during such times of high risk, investors would be better off if they made their equity allocations after keeping aside sufficient amounts in cash and safe assets. At the same time, we developed a new Risk Matrix that enables us to understand and evaluate the riskiness of businesses across various critical parameters.

We strongly believe that in investing, safety of capital is the first priority. If the downside risks are looked after, the upside tends to follow.

What, according to you, is the real reason for the current global market meltdown? Please share your comments or post them on our Facebook page / Google+ page

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01:26  Chart of the day
 
The prospects of a pullback of the monetary stimulus by the US Fed have sent a wave of panic across global markets. As such, Indian stock markets too fell sharply along with the global counterparts. In fact, on June 20, 2013, the Indian markets witnessed their biggest losses in the year 2013. Today's chart of the day shows five steepest market capitalisation declines in 2013. There is increasing fear about FIIs fleeing Indian markets. Apart from the global risks, a sharply depreciating rupee has further added to our troubles. As long as the rupee does not stabilise within sustainable levels, the RBI will find it difficult to cut interest rates. And this in turn would keep hampering economic growth.

Data source: DNA


01:45
 
Gold seems to be heading just one way these days, down. The yellow metal fell to a fresh three year low and recorded what can be called its biggest weekly drop in 30 years. The fall, of course, was in response to Ben Bernanke's comments that the US Fed is winding down its quantitative easing program. This reason, we believe, is akin to a good quality stock getting hammered on account of one poor quarterly result.

So the Fed may indeed wind down its quantitative easing. But what about the money printing that has already happened? Will it disappear just like that, at the click of a button? Certainly not! And the economic recovery that the Fed is talking about hardly looks like a real one to us. It is a result of ultra-low interest rates and huge liquidity being pumped into the system by the central bankers. And once these start showing their deleterious effects, gold is likely to be the last man standing as per us. So rather than view current prices negatively, it might actually be a good time to accumulate gold.

02:15
 
It's official. Rupee has become a senior citizen. We mean that the US dollar-rupee exchange rate has fallen to 60. The depreciating rupee has impacted both common man as well as corporates. First, let us see the impact on common man. Weak rupee fuels inflation. So, any product that a household consumes and is being imported has become costlier. Petroleum products have become expensive. So is studying abroad. Enjoying a vacation abroad or buying imported cars now remains a fancy. Not to mention the price of electronic goods that are mostly imported. In short, cost of living has increased. In fact, as per a survey in a leading daily, the increase in cost of living because of rupee depreciation is almost 15-20%. Thus, middle class households have been worst hit. Basically, depreciating rupee has created a hole in common man's monthly budget.

Now let us analyze the impact on corporates. The impact on corporates depends on whether a corporate has a dollar receivable exposure or a dollar payable exposure. If the company is about to receive dollars forward it will stand to benefit as it will receive more rupees per dollar sold. Examples include companies operating in the IT industry. However, if the company needs to make a payment in dollars it stands to lose out as it will have to shell out more rupees per dollar. Examples include companies which have forex liability in dollar terms. Or for that matter companies which are net importers.

While it is true that value of any currency should be determined by market forces, the current volatility calls for some action by the central bank. If not, rupee may soon turn septuagenarian.

03:00
 
India's so-called demographic dividend has been a hot subject. It is this dividend that was considered to be one of the biggest growth drivers for our economic growth. But the 68th survey by the National Sample Survey Office (NSSO) has brought to light a major problem on this front. As per the survey, India is now experiencing a jobless growth. Two trends seem to confirm this belief. On one hand, the worker participation ratio has declined to 386 per 1000 in FY 12 from 392 per 1000 in FY10.

At the same time, the unemployment rate has gone up from 20 per 1000 in FY 10 to 22 per 1000 in FY 12. Therefore even at a lower participation rate, the unemployment has still gone up. The reason for this is a grim one. The number of available jobs has come down in the wake of the economic slowdown. Unlike export oriented countries, the reason for the slowdown in India has more to do with the government. The government's lackadaisical attitude towards reforms; their inability to boost investor confidence; the deficit problems; and now the falling rupee - these are just some issues that have plagued the Indian economy in recent times. Unless the government comes up with a workable solution for these issues, the youth of India face a dim future.

03:50
 
Is China headed the US way? Based on developments in the credit market, it certainly appears that way. As per an article in Washington Post, the credit markets in the dragon nation have begun to freeze up. The implications of this are obviously not good. The country has grown at a stupendous rate in the past. But along with this growth have come evils such as formation of asset bubbles. Essentially it appears that the Chinese government is deliberately causing this problem and slowing down growth.

This is to avert what would otherwise lead to a bigger problem later on. And if that is the case, one should not expect high growth rates from the Chinese economy in the coming few years. In a situation where the US and Europe are mired in a slump, China cannot be really relied upon to rebalance global growth. But will China's strategy of a forced credit freeze up really work? It is too early to tell. One is that it may backfire, which means that the scenario will only become worse than it already is. The second is that it may work. But then the process of cleaning the system will be painful and will certainly put the break on China's massive growth. Either way, the days of China growing at a robust pace consistently appear to be over.

04:30
 
The Indian equity markets have been trading above the dotted line. At the time of writing, the BSE-Sensex was up by about 79 points (0.4%). Among the sectoral indices, power and IT stocks were leading the gains. However, metal stocks were facing selling pressure. Barring Japan, all other major Asian stock markets ended on a weak note.

04:50  Today's investing mantra
"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." - Warren Buffett

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    5 Responses to "Why are the markets panicking now?"

    Equitymaster

    Jun 24, 2013

    Please note that we believe that there cannot be a one-size-fit-all approach to investment allocation. The allocation for each asset could differ based on a personís risk appetite, investment horizon, expected returns, future cash requirements, etc. As far as the allocation to gold is concerned, we look at the yellow metal as an insurance against inflation and currency devaluation. The allocation could differ from investor to investor. As such, we recommend a minimum 5% of investments in gold and a maximum of upto 15-20%. You will appreciate that there cannot be an accurate number when it comes to matters of personal discretion.

    Like 

    R.VARADARAJAN

    Jun 21, 2013

    QE easing which might adversely affect the liquidity in float, chinese slowdown, lack of improvement in economic condition of Japan and Europe, US recovery not seen as stable, flight of capital resulting in selling of equities and debt, strengthening of dollar vis a vis most other currencies has caused the current volatality

    Like 

    Kranthi Mark

    Jun 21, 2013

    The whole world was wandering what will happen !.

    The problem is interpretition and understanding the things till now we have witnessed 3 QEs.Quantitative Easing a k a Money Printing was a problem earlier which created unusual liquidity in the world and raised the asset price inflation . Economists around the world blaming Benjamin Shalom Bernanke and calling him as Money printer .But some where he relaised on Money printing and want to correct the excessive money printing that also causing the problem for markets . It is simply like If you come across a drunken person either you can give him extra dose of bottle or you can ask him to reduce the consumption . Atleast Bernanke is doing now the second part finally lets appreciate.

    Like (1)

    samuel rajkumar pilli

    Jun 21, 2013

    National economies are based on liquidity concerns. greed has replaced genuine profit as the driving force. basic and solid economics has been buried. God save the world !

    Like (1)

    SWAPNIL

    Jun 21, 2013

    Despite I admire your kind of research over global economy there is something to share that I use to comment on questions raised by you but now its my mind raising question on your changing proportion of Gold in our portfolio some days its 20% and on the other 5%. Before we accept your analysis finest, are you sure about what you recommend to common people.
    Actually I do not expect much from you but to remain vindicated with your own views for a reasonable period of time.

    Like (1)
      
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