US loses its top credit rating first time in history! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

US loses its top credit rating first time in history! 

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In this issue:
» Emerging economies hold lion's share of the global economy
» Will car owners have to pay more for diesel?
» RBI may rethink its tight monetary policy
» India desperately needs to improve its health infrastructure
» ...and more!

----------------------------------- Free 10 Minute Video -----------------------------------

The US debt crisis may have been averted... but the chance that there could be a global crisis in the months and years to come cannot be ruled out.

In fact, the crisis could be bigger than anticipated.

Given this possibility, how should you plan your portfolio? Where can you find investment opportunities that could benefit from this scenario?

To get answers to these questions and more, we spoke to Asad Dossani, author of The Lucrative Derivative Report.

Asad's views on the crisis, and the opportunities it presents, are available in a 10 Minute video, which you can view right now! For Free! Just click here...


Finally, the eventuality that we have been arguing for a long time has manifested. Yes, the world's largest debtor, the United States of America, has lost its top credit rating for the first time in the last 70 years. Standard & Poor's (S&P) has downgraded long term US debt from AAA to AA+. The credit ratings agency asserted a negative outlook on long term US debt. It even warned of a further downgrade in the rating within the next 2 years if the US government's debt burden grows higher than that assumed by S&P.

You may ask how exactly a credit rating matters. In simple words, a credit rating gives the investor an idea about the creditworthiness of the debtor and the risk of default. If a bond has a low credit rating, it means there is more risk. Now, wouldn't you want a higher interest payment for assuming greater risk? Yes, of course! In fact, the impact of the downgrade would be much more severe if the other two large rating agencies such as Moody's Investor Service and Fitch Ratings also follow suit. It would force the US to raise interest rates and thus raise the cost of borrowing for everything.

This could send a panic wave across the world financial markets which in turn could cause a liquidity squeeze in the Indian stock markets. But is any of that going to change the economic fundamentals of our economy? We believe there will not be much real impact on India, unlike China which is the biggest creditor of the US. As far as stocks are concerned, we believe sticking to our value investing approach would help us sail through any kind of crisis.

Looking at the big picture, we are in the midst of a major shift in the world economic order. The economic supercycle that led the US to become the economic and political powerhouse in the 20th century is clearly turning. The gravity of power is shifting, albeit gradually, to emerging economies. The change will be full of shocks and upheaval. But the good news is that we are perfectly placed in the land of a billion opportunities.

Do you think the downgrade of US debt will affect Indian stock markets? Share your comments with us or post your views on our Facebook page.

01:15  Chart of the day
Talking further about the shift of power towards emerging economies, we thought it would be interesting to share some interesting numbers that confirm our argument. Today's chart of the day shows some key statistical indicators that narrate a compelling story of the rise of emerging market nations. While the developed economies are still way off from the real GDP (Gross Domestic Product) numbers they enjoyed in 2007, the emerging economies have grown by almost 20% in the same time period. They now contribute to almost a quarter of Fortune Global 500 firms and are catching up fast in commerce and finance. As against the year 1990, their share in the GDP (at market exchange rates) has almost doubled. If you measure the GDP at purchasing-power parity (PPP), emerging economies now contribute more than 50% of the world's total GDP. Emerging economies also account for more than half of the global consumption of most commodities, world exports, and foreign exchange reserves.

Data source: The Economist
*Purchasing-power parity

Ever since petrol prices witnessed a steep hike, the price differential between this fuel and diesel widened. This automatically led to a renewed demand for vehicles running on diesel. But that could now change. The government is contemplating introducing dual pricing of diesel to remove the subsidy enjoyed by car owners. Currently, passenger cars were consuming about 15% of the diesel supplied in the country. If this comes into force, auto companies will certainly be at the receiving end. Already the industry is facing some headwinds in the form of rising interest rates and fuel prices which have adversely impacted demand and led to slowdown in overall sales volumes. At the same time, the government has also been burdened with a high fiscal deficit and reducing subsidies will go a long way in easing of some pressure. While the Society of Indian Automobile Manufacturers (SIAM) supports the move favouring market determined prices for diesel, it opines that this dual pricing should apply only to personal use of diesel passenger cars. It believes that commercial applications of diesel passenger vehicles should be exempt from this scheme as it would impact mobility for the masses. What the government finally chooses to do though remains to be seen.

The Reserve Bank of India (RBI) has adopted strict monetary tightening. It has raised interest rates continuously in an attempt to control inflation. In fact, in its last meeting, the RBI announced the steepest hike ever in interest rates. It also indicated that it would continue to adopt tighter policies till inflation came under control. However there was one thing that the RBI had not forecasted at that time. This thing is the probability of a double dip recession in the global economy. With the debt crisis brewing in Europe and the imminent slowdown of US, there are fears that the global economy is sinking into another recession. At the same time the commodity prices have also witnessed sharp corrections due to the slowdown in demand. As a result, the Deputy Governor of RBI has hinted that the central bank might rethink their stance on monetary policies. Tightening at this stage may be disastrous for India which has already seen its economic growth slowing down. At the same time, with commodity prices easing off, it may turn out that inflation does come under control without the need to raise rates.

That India ranks low globally in its rate of vaccinating its population probably comes as no surprise. In 2010, only 72% of Indian babies received the three doses of the DPT vaccine against diphtheria, tetanus and whooping cough. This was quite poor when compared to 95% for Bangladesh and 83% for Indonesia. The reason for this dismal statistic has been attributed to weak, decentralized public health infrastructure and inadequate monitoring. And so, in a bid to make sure that there is extensive coverage of babies that would require vaccination, India's health minister has come out with a new initiative. This would involve collecting mobile phone numbers of all pregnant mothers to monitor their babies' vaccinations. While this project has already begun, the quantum of funds invested for this project is not known. That said, one wonders whether this plan will really solve the problem that confronts India. For starters, there could be discrepancies in the mobile numbers themselves, a problem that the health ministry is also facing. What India could probably do is make healthcare a priority at the Centre rather than relegating it to states.

The week gone by was a poor one for the global stock markets as the latter witnessed heavy selling pressure on the back of some negative developments in the US. In fact, the US markets had their worst week since the 2008 recession (down by nearly 6%). The debt deal that was struck by the US government did nothing to alleviate fears of a double dip recession in the US economy. Some economic data released was not too enthusing either as reports on manufacturing and consumer spending published weak numbers. This fuelled the anxiety of investors and led to a selling spree across the world markets. There was no improvement seen with respect to the Europe debt crisis either.

Indian stock markets faced the brunt of heavy selling too with the BSE Sensex closing lower by 4.9% during the week. Amongst the other world markets, Germany was the biggest loser (down by 12.9%) followed by France (down 10.7%) and Brazil (down 10%). However, China showed some resilience and was down by only 0.9%.

Data source: Yahoo Finance, Kitco

04:45  Weekend investing mantra
"Today, there are three kinds of people: the have's, the have-not's, and the have-not-paid-for-what-they-have's." - Earl Wilson

Editor's Note: We just recorded a 10-Minute video with Asad Dossani, author, The Lucrative Derivative Report, on the global crisis and how it could impact you. We recommend you view the video right away...

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9 Responses to "US loses its top credit rating first time in history!"


Aug 8, 2011




Aug 7, 2011

I Invest For Long Term (5 Year)So Please Tell me long term
investing shares.



Aug 6, 2011

Well, the downgrade is definetly going to impact the financial markets throughout the world. But should we be much worried.?? I think not. Read what Mark Mobius has to say: The emerging markets are in amuch better shape. If you look at the GDP levels,foreign exchange reserves, emerging markets are in a very sweet spot" The author of Gloom, Boom and Doom has such a nice view of emerging mkts, it can be only positive for our stocks.
Yes we may have two days of down turn, and by that time we will be so oversold, that mkts will turn positive from Wednesday. Buy Call options on late Monday or tuesday .
If the developed mkts are down, two things will get their share of diverted funds: Gold and Emerging mkts. And for our stocks to move up even a couple of billion $ is sufficient. Check out June & July data.
So a few billion dollars, will push up our mkts., Be ready to buy good stocks; (Fortis Health, Cummins,Titan etc.) Best of luck.
Damani SK



Aug 6, 2011

Our economy which is not as much dependant upon export-led growth and
can survive on domestic growth, it will bode well for us. Alongside,
if commodity prices indeed come down as global growth has corrected,
probably, it will create reasonable earnings momentum in our economy and
corporate world, which in-turn could result into flows from rest of the
world into our market.
In last couple of quarters,
global economy has not been growing at a rapid pace, but India’s exports
have jumped up significantly. So we have proven to the world that even in
a stagnating growth, we can grow and we can export too.
we have to watch How the domestic investors will behave, if our mkt
correct from here we could again start recovering, which could be
independent of developed markets, like we did in 2009. If
on infrastructure and other policy matters, parliamentary decisions
come out, then probably, that will attract attention towards India. Over
the next 12 months, we feel that
India will outperform global markets and this panic right now, provides
a good opportunity to accumulate.
The market will not correct in the near term in any major way
So do not panic, rather use any panic day to build our portfolio.



Aug 6, 2011

Excellent analysis.Please keep it up. It was extremely educative and useful.


Mahesh Shah

Aug 6, 2011

When a Politician tries to make himself POPULAR at the COST OF RULES OF ECONOMY - this is inevitable and USA IS NO EXCEPTION. We are seeeing in India with SUBSIDARIES in many items by POLITICIANS at the cost of DEBT BURDEN resulting in Inflation in Long Term. WORST IS DURING ELECTIONS FREEBES like TV etc etc and MANY MORE EVILS like RESERVATIONS based on RELIGIONS,CASTES etc are PROMISED.


Pradeep Hattangadi

Aug 6, 2011

It now depends how our great politicians view the scenario. We are bogged down by corrupt politicians and this has effected the growth of investments as well as the confidence of investors. We may a land of opportunities right now but may turn out to be a land of missed opportunities.


Pawan Grover

Aug 6, 2011

We have seen in the past that Indian Market is more affected by the developments in US and Europe. Defintely this will also affect our markets and Indian market may see further down trend at least in the near future.



Aug 6, 2011

The dual policy envisaged by the goverment of India ,we can see another scam coming up.
One will find the petrolpump oweners whom many are owned directly or indirectly by politican and babus stating they are filling up for trucks but actually supplying to cars and pocketing the difference
The Goverment is giving one more avenue of black money generation

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