Investing is all about managing, and living with, uncertainty. The latest round of hiccups on stock markets across the world, particularly in emerging economies, has once again seen fund managers turn skittish.
The two biggest uncertainty factors that dog investors are oil prices and the subprime crisis. The latter squarely points to excesses in the US lending system. There will surely be a reset of risk appetite in the financial sector. More importantly, it will have strong trickle down repercussions on the consumer credit-driven US economy and can push down growth rates from their already subdued levels.
That’s not a very encouraging prospect for an economy that has been the driver of global economic expansion in the last century. Whether we’ll see a full-fledged recession or not is debatable but the hit is definitely going to happen. Meanwhile, the dollar’s depreciation will exacerbate the pain for the indebted and splurging US consumer, who will be much the poorer with every downward movement of the dollar.
Meanwhile, the unsettling factor No. 1 is rising oil prices. Oil at $100 a barrel directly hits prices of all other goods and services across the board and unleashes the monster of inflation. Here in India, we are artificially shielded from rising oil prices by the government’s oil bonds.
This leads to worsening government finances. A rapid cooling off is the direct risk factor that investors in India have to worry about when this deficit comes home to roost.
So what’s positive for the emerging economies? Plenty. Productivity is riding up the two enablers: investment in infrastructure, productive assets (such as factories and service workspaces) and improving demographics. Most emerging markets are set to make the transition from resource and commodity-rich centres into manufacturing and services hubs.
This also unleashes domestic consumption over time, as incomes rise, and makes emerging economies relatively less vulnerable to a US slowdown compared with how they used to be a decade or more ago. A new world economy is being created by the massive investment and growth in the emerging economies.
Very soon, the incremental production from these investments will increase supply of competitively priced goods and services, not just within their economies but around the world. The first world will soon have a parallel, flourishing and growing emerging world that will rival it in quality, cost and efficiency. Much of this change is already visible.
Where’s the risk? I think it is ultimately the quality of governance in the emerging world that will determine the long-term future trajectory of its economies. Not surprisingly, the worst governed countries are suffering the ignominy of crippling poverty: Bangladesh, Pakistan, Afghanistan, Iraq, Myanmar... It is here that the real challenge lies for India.
Will public and corporate governance improve to a level where the new investments in our infrastructure begin to pay off? Can we make the transition from stoic socialism to capitalism with a human face? Will our ecology and environment survive this transition? There are winds of change sweeping across the land. Strong winds. Stay invested, the short-term pain is worth the long-term gain, provided you know what you are doing.