Investors wake up to the harsh reality

Fri, 5 Feb Pre-Open

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The writing appears to be on the wall. Yesterday, Dow Jones, the US stock market barometer tumbled 268 points and closed at its three month lows. Things were not rosy at other stock markets either as a broad based selloff took centre stage. It was a combination of a weaker than expected jobs data in the US and sovereign debt issues that spooked the markets. Thus, the gloom that pervaded stocks right through the month of January has prevailed so far in the current month as well. And there seems to be no end in sight. Slowly but surely, the reality that the economic environment, especially in the developed world, is not as good as the stock market rally of 2009 would have us believe seems to be dawning upon investors. In other words, the stock markets had run up way too ahead of fundamentals and now having realized their mistake, seem to be in a correction mode.

So, how long or how deep the correction is likely to be? Frankly, we do not have an idea. In fact, there is a strong possibility of them overreacting on the downside just as they have done on the upside. Indian markets too should not be expected to escape the pain.

However, unlike the developed world, the Indian investor is not staring at an uncertain future and years of sub par growth. It is instead looking at an economy that is likely to remain one of the fastest growing in the world for many years to come. And hence, the investor should pounce upon the opportunity that any significant corrections might present by investing in fundamentally strong Indian companies available at reasonable valuations. Thus, while the investor in the developed world may not know what to do during the deep slump that could come, his Indian counterpart could do well to grab some fundamentally strong counters at attractive valuations.

The focus shifts back to the Yuan
It isn’t that all is lost for the US economy. One way out of the current mess for the US could be to grow its exports. But it may not be easy. They are most likely to run into the Great Wall of China. And the deliberate undervaluation of the Chinese currency is making the US authorities all the more nervous. Little wonder, the US is going all out to try and force the Chinese to undertake a gradual appreciation in the Yuan.

The Chinese though may be in no mood to oblige. It knows quite too well that its export driven economy could come under threat from other emerging nations if there is a meaningful appreciation in the Yuan. And this is the kind of risk the dragon nation may not be willing to take in the current environment. Hence, it would be interesting to see how this battle pans out in the days to come. By all indications, the US is likely to continue to keep stepping up the pressure.