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US attacks: Chain reaction

Sep 13, 2001

After crashing by over 6% in intra-day trading the Sensex recovered towards the close. The Sensex closed at a 34 month low at 3,032. The fall was triggered by fears of a worldwide recession.US markets for the first time will remain closed for two consecutive days since the end of World War - II in 1945. The trading on the NYSE is expected to resume only on Thursday. As a result, the reaction of the US markets would be reflected on Indian markets only on Friday.

US economy, which accounts for over 22% of world's total GDP, is already witnessing an economic downturn. Hopes of a consumer spending led recovery now seem unlikely in the near future. The blow to the world's economic powerhouse came at a time the US and the rest of the world could ill afford. The last time the US suffered a recession (triggered by the Gulf War) was in early 1990s.

South East Asian economies including Japan increasingly rely on the US for their exports. As per reports, Japan is about to enter its fourth recession in a decade. China, which has the most robust economy in Asia, has also been relying on US for sales of electronic goods. These economies are likely to get hit if the US economy slows down further. India although accounts for a miniscule 1% of the world's GDP, it cannot remain immune from the worldwide slowdown considering the increasing globalization.

As this enormous disaster is unprecedented in the US history, it would be difficult to predict the impact on financial markets globally. Historically, such an event has always led to a panic reaction of the markets with a late recovery.

In India too the Sensex managed to close above the 3,000 mark. In the near term we might see flight of FII money. Influential institutions, headquartered in the US may decide to reduce their overseas weighting in their portfolios. This however depends on the macro economic environment prevailing in that country. Indian economy is still growing at above 5% and is not export driven unlike other developing countries of South East Asia. However, fortune of the sectors including software and pharma (frontline pharma companies) are feared to take hit in the short term.

Software companies are already initiating steps to reduce their exposure to the American economy. But since Indian software companies offer end-to-end solutions at comparatively lower costs and better quality, they are likely to be the vendors of choice for US corporates. On the other hand pharma majors are eyeing US generic market to boost their revenue growth. But considering the size of the US healthcare market, Indian pharma companies are unlikely to see reduction in their business.

The underlying sentiment is one of uncertainty. On the one hand the Indian economy continues to chug along despite the global slowdown. On the other hand there are emerging global issues, which threaten to push the global economy into a recession. The stock markets have recorded a sharp increase in intra day volatility in response to this uncertainty. The Sensex has also tested the 3 year low. The sentiment is very pessimistic and is likely to remain so until there are new developments, which boost investor confidence.

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