Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
9/11: 2006 v/s 2001! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Sep 11, 2006

    9/11: 2006 v/s 2001!

    Today is a day that will mark the fifth anniversary of the deadly attack that brought down the world trade center, the symbol of the American economic might and the one that forever left an indelible mark on the American psyche. The repercussions, however, were not just political.

    The attacks completely knocked the winds out of the sails of US economy, which was already reeling in the aftermath of the tech bubble burst. Something had to be done to prop the consumption levels, which had hit quite a low since people opted to save rather than spend, as uncertainty loomed large before them. US central bank, more popularly known around the world as the Federal Reserve, then took the all-important step of slashing interest rates and bringing them to virtually zero, thus egging the US consumers to not just spend but splurge. And splurge they did! Armed with one of the lowest interest rates in decades, they went about buying anything and everything that came their way and in the process gave a much needed boost to the US economy.

    Elsewhere in the Far East, an event not as visible as the travails of the US economy, but equally important, was fast unfolding. With robust economic growth in the region of 9% to 10% behind it, China was finally coming into its own and was asserting its newfound economic importance on the world stage. With cheap labor force in abundance and ruthless utilization of economies of scale, the country was fast acquiring a reputation of being a factory to the world. However, maintaining the growth momentum required massive amount of investments in its infrastructure and the country soon turned into the world's largest consumer of a lot of industrial goods and services. In fact, more than half of world's total output of a lot of commodities was gobbled up by China in order to feed its ravenous appetite for manufacturing driven growth.

    Thus, the world economy fast turned into a two-horse chariot, with both the US and the Chinese economy perfectly complementing each other. Buoyed by rock bottom interest rates, the US consumer bought cheap Chinese goods by the truckloads and the Chinese manufacturer in turn utilized the money by investing in capacity expansion and sprucing up the country's infrastructure. However, neither was China going to be able to meet all its demand for commodities internally and nor was it the only market the US consumers relied upon. This bought other nations and their respective companies into focus and the economic revival, which was kicked off by the US consumer, and the Chinese manufacturer soon spread its tentacles far and wide.

    As the bottomlines of companies across the globe improved on account of this economic revival and their value became apparent, cheap money that was locked somewhere in the US bank account soon found its way into the equity markets. Infact, prices of all the assets started moving northwards. This period soon turned into one of those extremely rare cases in history where prices of almost all the commodities witnessed a simultaneous rise.

    Although India's contribution to this revival was not that significant, this period coincided with one of the best ever as far as acceleration of the economy was concerned. This obviously whetted the appetite of fund managers across the globe and the same cheap money that found its way into other emerging market asset classes also found its way into India. Soon, the extremely well regulated and technologically savvy Indian equity markets witnessed an unprecedented buying interest. Notwithstanding a few bumps in the interim, the Indian benchmark indices have witnessed a more than three fold jump in their market capitalization over the last 3 to 4 years and turned quite a few people in millionaires and billionaires.

    Another important factor that contributed to this global economic boom was the re-emergence of Japan, the land of rising sun. After spending almost a decade in economic wilderness, the world's second largest economy finally shed the garb of its ultra-conservatism and is currently heading for its longest expansion in the post war period, one that has already lasted more than four years. Here again, exports to the US and China, like elsewhere, played a crucial role. Of late though, the Japanese consumer has also started spending liberally, thus leading to internal consumption also contributing towards its GDP growth.

    Thus, while the rate cut by the Federal Reserve did help boost the world economy, the role of China in taking it to the next level cannot be understated. However, the step that was taken to boost the US economy started to backfire. Infact, a worry of exactly the opposite kind started haunting the US Federal Reserve. The consumption binge that Fed itself kicked off has risen to quite an alarming level and has left a gaping hole in their deficit. Before situation threatened to spiral out of control, it stepped in and did a U-turn by resorting to 17 consecutive quarters of interest rate hikes to stem reckless spending by the US consumer. The impact has been positive so far, as due to demand slowdown, prices of some commodities have indeed fallen. However, not wanting this to have a hard landing effect on the economy, the Fed is currently adopting a wait and watch approach.

    As far as the impact of this on India is concerned, we believe that unlike China or its South East Asian counterparts, growth in India is pre-dominantly internal driven and as such, it stands lesser exposed to the risk of a global slowdown. However, the capital market perspective does not go in lock step with the economic perspective. While there is no denying the potential of the country as an attractive investment destination, the role of FIIs in the recent bull run cannot be overlooked. Thus, as seen on a couple of occasions in the past, any pull out of funds by them is likely to spark a much broader sell off in the Indian equity markets. Moreover, at the current valuation levels, the relative attractiveness of the Indian equity markets vis-a-vis the US interest rate is considerably lesser than in the recent past. Hence, we would advise investors to exercise caution at the current juncture with regards to their equity investments. Although the India growth story is still intact, most of the sectors currently seem to be overbought and hence vulnerable to Foreign Institutional Investors (FIIs) outflows. A proper study of risk-reward ratio is of the essence!



    Equitymaster requests your view! Post a comment on "9/11: 2006 v/s 2001!". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 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 (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    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.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. 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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)