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Rebalancing the global economy

Nov 19, 2009

It goes without saying that some hard lessons are learnt only during moments of crisis. And just like any crisis, the current global financial one lay threadbare some very glaring imbalances. The important one is that the fortunes of many of the countries across the globe were dependent on what the US consumer does. So when the US economy stuttered as a result of the crisis, Americans suddenly become wary of loosening their purse strings. Thus, all hell broke loose especially in the emerging economies. Take China for instance. China's booming economic growth before the crisis erupted was fuelled by exports to the US and Europe. Once the US economy suffered, China's exports contracted dragging down its GDP growth as well. The same has been the case with many Asian economies which have been dependent on developed nations for driving their exports. In that sense, India stood a little apart. This is because our country is not entirely dependent on exports and its domestic demand is strong.

So, over the years the US turned a debtor due to its massive borrowings. China became a creditor due to its large holdings in the US Treasuries. This more than anything else has highlighted the need for rebalancing the global economy. In this regard, the US Treasury Secretary has said that moving from a global economy based on US demand to one based on global demand is critical. China for its part also seems ready to undertake some reforms. The country intends to reduce its reliance on heavy industry and exports and focus more on domestic demand. China's currency, however, continues to remain a matter of contention. Since it is pegged to the US dollar, the yuan has been undervalued. In the meanwhile, huge inflows have caused the currencies of other Asian economies to appreciate and have hampered their exports further.

The intentions of both US and China seem in the right place. But whether any meaningful attempt will be made to turn these intentions into action is another matter altogether.

Mobius is bullish on BRICS
The BRIC nations continue to catch the fancy of global investors. What is more, Mark Mobius opines that stocks in Brazil, Russia, India and China are likely to rise by 30-40% within three to four years. This will be led by higher economic growth and lower government debt which will spur corporate earnings. He also believes that while a sudden violent correction is likely in a bull market, investors should be ready to buy.

Having said that, stocks of all the four nations have zoomed in 2009 so far. In India particularly, valuations have become expensive. Thus, while the growth story remains intact over the longer term, the challenge will be to opt for those companies which have strong managements, strong products and are available at justifiable valuations.


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