The biggest risk to global economy is... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The biggest risk to global economy is... 

A  A  A
In this issue:
» India in a juicy sweet spot, says Roach
» One of the greatest mysteries of our times
» Indian Equity MF investors turn market savvy
» Gold continues to create new records
» ...and more!

----------------- Free Invitation -------------------
Equitymaster WebSummit - Meet the man who predicted the US financial crisis
On Monday, 16th November, 5:30 PM.
It's FREE. Click here to register! (only Email ID required)


What could be the biggest risk to global economy right now? If Stephen Roach, one of the world's leading economists is to be believed, the biggest risk to the global economic climate right now is the US-China trade friction. Speaking to a leading business daily, Roach opined that since the unemployment levels in the US are extremely high right now and since politicians do not have an easy solution to it, they are most likely to pin the blame on China and this may result in import restrictions put on Chinese goods.

Roach further added that China is a proud nation and may not keep quiet at this provocation and in turn may stop buying US treasuries, a particularly nasty scenario for the US dollar. Roach was also of the opinion that rather than blaming each other's currencies, the US and China should do something to curb the structural disparities in savings and consumption between the East and the West. While the US should focus towards increasing the savings rate, China, which Roach believes is the most unbalanced major economy in the world today, will need to shift from export dependency to internal private consumption. Hope the policymakers of the two countries take a leaf out of Roach's book.

Roach did have some good words to say for the Indian economy though. According to him, the Indian economy is moving into a very juicy sweet spot. And he has compared the economy to a three legged stool - the micro, the macro and the politics - where while the micro has always been good courtesy India's large and well educated English speaking population and rule of law, the macro and the Indian political scenario without the meddling of the left has also started looking good of late.

00:58  Chart of the day
Today's chart of the day perhaps presents the greatest paradox of our times. What do you think is a good gauge of a country's economic strength? Its currency or its stock markets? If you answered both then perhaps the chart laid out below will leave you scratching your head. Since the lows of March 2009, while the US stock market benchmark, the Dow Jones, has risen by a significant 56%, the purchasing power of the US dollar vis-a-vis gold has come down by 15%. What more, it has also moved down by a similar margin against a basket of currencies. Thus, either the stock market rally is false or the dollar's decline. Fortunately, we do have some objective criterions viz. the earnings trend of US companies and the US balance sheet to make some reliable assessment. And the criterions do point towards the fact that the US dollar is indeed under pressure. Thus, a conclusion that directly follows from this one is that the US stock market rally of the past six months may not be true after all. Hope the US stock market investors are listening.

Source: Oanda, Yahoo finance

Although the US financial crisis may not have caused a lot of damage to the Indian financial system, that has not stopped its citizens from giving the US investment bankers, believed to be the chief architects of the crisis, a piece of their mind. Yesterday's wrap up had a claim by one of US' top investment bankers that they are doing God's work. And if the response by our readers is any indication, they seem to be furious at this assertion. "It sounds like a statement from a politician and not from a business CEO", says one of our readers. While still other says, "If arrangers of Capital are doing God's work then I wonder whose role are the guys who fund the capital are doing." Clearly, looks like the bankers won't be forgiven in a hurry.

The Indian stock markets have rallied at a scorching pace this year. What is more, investors seem to be getting jittery at this meteoric rise. Otherwise what would explain the fact that in October 2009, investors booked profits worth Rs 66 bn in equity mutual funds, the highest ever for any month? At the same time, Rs 44 bn was poured into these funds resulting in a net outflow of Rs 21 bn, which also happens to be a monthly record. No doubt that the markets this year have gone too high too fast and investors, who don't want to repeat the mistakes last year when markets touched 21,000 levels, are looking to take some profits off the table.

Mutual fund houses also agree that lack of push from the financial advisors and mutual fund agents, who now have to claim their commissions directly from investors, has had an impact on business. However, overall the general perception is that investors are taking informed decisions, and this indeed is an encouraging sign.

Given its repute of being one of the most agile and conservative central banks in the world, the RBI is in no mood to let excess liquidity stoke inflation. The RBI is thus leaving no stone unturned to ensure that the liquidity situation is closely monitored so as to be able to take necessary action. Although the central bank did hike the SLR (statutory liquidity ratio) at the latest monetary policy review, interest rate hikes are in the offing. The government's resistance to wind up monetary stimulus has been a key deterrent for the RBI. Nevertheless, with the credit growth rates in the system continuing to remain abysmal, the RBI will have to adhere to its role of being the financial sector watchdog with all the more precision.

Nouriel Roubini may not like it but the fact remains that the yellow metal Gold has got into this habit of breaking new highs almost every day. Last heard, it set a record high on Tuesday to settle at US$ 1,102 per ounce. The latest surge has taken the total returns from gold this year to 23%, a number that an investor in any part of the world would be proud of. However, the 23% returns could be true for investors who would like to pay for their gold in dollars. And India is certainly not one of them. Since an Indian investor would pay in rupees, the rupee dollar rate also gets added into the equation. Considering that rupee has appreciated some 4%-5% against the dollar this year, returns from gold for an Indian investor this year has been lower to that extent.

But that should not deter an Indian investor from investing in the commodity. The case for gold will remain intact as long as the world's reserve currency, the US dollar continues to remain weak. And there seems to be no respite in the near term on this front

The Left parties are at it again. As per a leading business daily, the four left parties have dashed off a joint statement to the government calling its 10% divestment program in profitable PSUs a patently, anti-national step. "With this, the Congress-led government has laid out a road map for the privatization of the public sector units as it will require only a small step to bring down the government stake to a minority, that is below 50 per cent", the statement is further believed to have said.

While we don't think the government will bring down its stake in profitable PSUs below 50%, what bothers us is the strategy that the government seems to have adopted of selling stakes in assets to bridge the gap in fiscal deficit. Such a move will achieve nothing in the long run and if the trend persists, the government will be left nothing to sell few years from now. What is required is the delicate balancing of its expenses with its revenues and a strong oversight over how funds are being spent.

It appears that the rain god has had a surprise change in mood in the last couple of days. The post monsoon showers that have hit parts of Maharashtra, Gujarat and a few northern states brought cheers to some farmers and tears for others. While the cash crops like grapes and cotton are likely to be damaged by this rain, rabi crops like tur and jowar which were sown in September will stand to benefit, much to the farmers' delight.

Sugarcane crops will be particularly impacted, affecting jaggery production prospects. Groundnuts, rice, maize and other cereals might be impacted as well. However, wheat farmers and fruit growers of Himachal Pradesh and other northern regions are enthused by the breaking of the dry spell. Indian monsoons always seem to live up to their reputation of being uncertain in nature.

Meanwhile, Indian markets had a rollicking session today, what with the BSE-Sensex trading higher by more than 300 points at the time of writing. Technology and metal heavyweights were seen leading the rally. Asian indices also had a strong session today and most European indices have also opened on a positive note.

04:47  Today's investing mantra
"Growth benefits investors only when the business in point can invest at incremental returns that are enticing - in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor." - Warren Buffett
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.

Equitymaster requests your view! Post a comment on "The biggest risk to global economy is...". Click here!

5 Responses to "The biggest risk to global economy is..."

Dibakar Pradhan

Nov 12, 2009

We have to maintain the equlibrium in regards to domestic productivity and the import to stabilize the indian economy. The Fii can boost the market but weekens the indian economy ,if unless and until we drive the gdp growth in our country we may face the same consequesnce like the Us economy.


Madhukar Nayak

Nov 11, 2009

To my mind an appreciation Rupee against US Dollar should result in increase in returns on Gold investement in India


O.P. Sabherwal

Nov 11, 2009

Rightly said: prospect of a clash between US and China on trade flow regulation is a major global threat. Likewise, it should be stressed that if Indian economy is to grow at the pace warranted by present opportunity, it should build further on its good savings rate by stimulating its exports in a big way. India can learn from China in using a part of its FE reserves by offering dollar trade loans to appropriate developing countries. Even Pakistan and Bangladesh -- why not?



Nov 11, 2009

The leftists always think that they are the only saviours of our nation. But in reality the national agenda is the last in their album. Show me a single leftist who lives in poverty for the labour class, by the labour class and of the labour class. Even with a magnified glass you cant find one. Perhaps EMS Namboodiri Padars was the last true communist who distributed his 200 villages among the poor.


Mahinder Sobti

Nov 11, 2009

the analysis of the international trade relations vis a vis USA is quite convincing. The balance between the national properatties & the human intrests calls longterm approach to the the global political enviorment.

Equitymaster requests your view! Post a comment on "The biggest risk to global economy is...". Click here!


Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: Website: CIN:U74999MH2007PTC175407