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Global: Off the beaten track!

Jan 24, 2005

The week ended January 20 saw markets round the globe moving 'off the beaten track' as market participants remained apprehensive about the course of the US economy, inflation and interest rates. The pressure was mounted as 'negative' vibes from the Fed regarding a hike in interest rates continued in this week as well. The pressure was also seen across other major indices, especially from those of the emerging nations. Leading losers this week included the Hang Seng, BSE-Sensex, Nikkei, and the Dow. Also, this week marked a straight three-week decline in the Dow.

Key global indices...
  14-Jan-05 21-Jan-05 Change
NASDAQ 2,008 2,046 1.9%
CAC 3,834 3,842 0.2%
DAX 4,212 4,220 0.2%
Hang Seng 13,573 13,544 -0.2%
BSE-Sensex 6,221 6,183 -0.6%
Nikkei 11,358 11,285 -0.6%
Dow 10,621 10,471 -1.4%

Readers should note that the minutes of the meeting of Federal Reserve (held on December 12, 2004), which were released a couple of weeks back carried some accompanying facts that led to investors across the world panicking in belief that the faster rise in the US interest rates will lead to the 'hot' Foreign Institutional Investors (FIIs) money reversing its flow, back towards the relatively safer US treasury bills and bonds. The minutes of the aforesaid meeting indicated that, apart from the indirect effects of higher energy prices, the recent depreciation of the US dollar against key currencies was also putting pressure on inflation, thus increasing risks of a faster rise in prices going forward.

These key details of the Fed meeting led market participants to believe that the US central bank might raise interest rates faster than in the past, thus increasing risks of re-allocation of FII money back to US equities in 2005. Apart from that, the fact that economic policies across the globe are now more integrated than ever before, investors seemed to have believed that in light of the US Fed raising interest rates at a faster pace, central banks across the world will follow suit, thus stalling investment and consumer spending. A hint of the same was seen this week in form of a report indicating weaker consumer sentiment.

This week, also playing spoilsport on the sentiment were factors like spiraling crude prices and weaker than expected earnings reports from some large US companies like eBay and Citigroup. As a matter of fact, US light crude for futures have risen to above US$ 48.5 per barrel from their low of US$ 40.5 per barrel around four weeks back. Lower inventory levels in the US have resulted in this latest spike in crude futures and this has concerned investors round the globe.

What should Indian investors do?

In light of the concerns that have been mentioned above with respect to FII flows reversing their direction and concerns regarding rising crude prices, we suggest that investors should be cautious when it comes to investing in equities at the current levels. Apart from the fact that return expectations needs to be toned down, investments need to be staggered over a period of time. Happy investing!

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