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US and us: Similar, yet different!

Jan 25, 2007

US and India - one, the world's most powerful and the richest democracy while the other, the biggest and one of the most promising. While the titles that define them are different, their stock markets met with a similar fate in 2006. S&P 500, one of the most widely tracked indices in the US jumped nearly 14% in 2006 and in the process had its best year ever since 2003, when it gained a little over 26%. BSE-Sensex, the Indian benchmark on the other hand, for the second year in a row, gained more than 40% and continued to fuel tremendous investor interest.If we were to superimpose the movement of the two benchmark indices, we do not think they will fall out of sync at too many places, indicating the extent to which global integration has pervaded our lives. Both the indices went up strongly during the initial months, declined sharply in the middle part of the year and then again settled into a northbound journey, ending the year significantly higher than what they started off with.

The rally in the US was largely an outcome of the tremendous resilience shown by the economy in withstanding the central bank's rate hikes. If this was not enough, record high crude oil prices and a falling housing market were the other major factors that they had to contend with. But everything started falling into place towards the latter half of the year as the Fed stopped raising rates and energy prices started heading downwards in light of inventory pile up. All this while, factories in the Far East, especially in China, ensured that they keep supplying cheap goods by the shiploads so that the demand and consequently, the economic growth, do not taper off.

Elsewhere, the Indian growth story was continuing to unfold. Everything that is required for an economy to grow was happening. Industrial growth, a laggard in recent times was really coming into its own, jobs and income levels were on the rise, there was availability of reasonably cheap credit and above all, a feeling of confidence and the ability to take on the best in the world was driving the nation to achieve record GDP growth rates, which in turn was helping the Indian corporates to continue to rake in some strong earnings numbers. Taking these cues, save for some blemishes during the middle of the year, Foreign Institutional Investors (FIIs) continued to show interest in the Indian stock markets and really put their money where their mouth was. And indeed, most of them would have gone laughing their way to the banks, as evident from the strong rise in the value of Indian equities.

Thus, as we saw, 2006 turned out to be a very good year for the stock markets of both the nations and unlike in the past, the ascent was one of cautious optimism and not reckless. That brings us to the next question? Will 2007 turn out to be as good or something untoward is in store for us. Given the large number of variables involved, it will be a very difficult question to answer.

We are already nearing the end of the first month of 2007 and so far, the journey has been tumultuous to say the least. Interestingly, the problems faced by the two economies could not be more contrasting. While there are doubts over the US economy's expansion at the rate witnessed in the recent past, policymakers in India seem to be breaking their heads over how to contain the rapid growth that has now left inflation touch higher levels. While these are fleeting concerns and should soon pass, what are permanent are the inherent characteristics of the two nations that allow the powerful force of entrepreneurship and capitalism to fully flourish and in the process allow economies to achieve rapid economic growth. While one nation is already relishing the rich fruits of the same, the other seems to be well on its way of doing a repeat act!


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