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And the story continues

Oct 9, 2004

...as another report stating a poor (or less than expected) job growth in the US has been released. This might lead to further concerns over the sustainability of the global economic recovery that is, and has been, powered by the incessant 'consumption desires' of the US consumer.The job report for the month of September 2004 states that the US non-farm sector has added 96,000 jobs in the month, much lower than expected. This is likely to further fuel investors' fears of slowdown in the global economic growth that has already been marred by the continuous strengthening of crude oil prices, which are comfortably hovering over the US$ 53 per barrel mark.

While this is bad news for the global economy, one could take respite (at least for the time being) from the fact that this low addition to employment might (might) lead to a pause in the Federal Reserve's tightening of interest rates. While commenting anything specific on this front would amount to speculation, what we are trying to say here is that, in a logical way, the Fed might postpone its 'measured' interest rate hikes believing that if it did not do so, and rather raise rates, that might have a harmful effect on the strength that the US economy seems to be gaining at present. This is because, if the highly indebted US consuming class, which is already reeling under the pressure of job cuts and, thus, reduction in purchasing power, reduces borrowing due to increasing interest rates, who will buy all the merchandise that factories of Asia (read China and other Southeast Asian nations) produce for them?

Now, while the Indian economy would not be affected much from the reduction in US consumption because of the fact that our export dependence is a lot much lower than our Asian peers, we need to study carefully the constant rise in global crude prices. At US$ 53 per barrel, these prices are already around 80% higher then the average price of US$ 29 per barrel for the period 2000 till date. And if these were to stay at these (or higher) levels for a long time, the reverberations will definitely be felt on the Indian economy. To put things in perspective, India imports nearly 70% of its oil requirements and as per a report from the International Energy Agency (IEA), Indian uses 2.5 units of crude to generate every unit of GDP. This is much higher than what is used in developed countries and, as such, should be a considerable cause for concern for Indian authorities.

Considering the above two concerns (reducing US consumption and rising crude prices) and also the fact that Indian markets have gained significant ground in recent times (Sensex is up almost 9% in the last one month), we believe that investors need to exercise some caution. While a staggered approach needs to be the mantra, investors should also have a long-term investment perspective. For in the short tem, there are a lot of uncertainties that need to be taken care of.


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