Recession. Quantitative Easing. Sovereign default. Ratings downgrade. All of these words, individually and in combination, are representatives of the developed economies. While rising inflation and interest rates and a stronger currency are the best envoys of emerging economies. The commonality between the two is investor reaction to uncertainties.
At the current juncture, with over 4 per cent correction in key US indices, coupled with an average 3.25 per cent correction in European indices, there is no denial that there is a bloodbath in the equity markets. And Asian indices are bucking the trend in a more aggressive fashion. With a 4.20 per cent correction in its indices on an average, some of the markets are yet to react to the mayhem in US markets.
PERSPECTIVE: US debt row adds to global uncertainty
Traditional wisdom holds that developed economies' pain means emerging economies' gain. But the same does not apply to markets which spontaneously mirror trends. So, a recession in the US and worsening crisis in Europe might not bring cheer to emerging markets. These reasons are just not enough for investors' funds to flee into emerging economies. The latter have their own set of challenges to tackle on the domestic front. Slowing growth, rising inflation and higher interest rates are peculiar a problem across emerging economies, including India.
With relatively lower inflation India was an outperformer among emerging economies in 2010, but the scenario is reversed in 2011. As of August 4, this year, the BSE Sensex
has underperformed by 13.73 per cent when for a similar period in 2010 the Sensex delivered a positive 4.65 per cent gain.
HOW THE MARKETS FARED ON THURSDAY
Quoted / Closing
|Dow Jones Industrial Average||11,383.68||-512.76||-4.31%|
|Source: Yahoo Finance|
The outcome of this is visible in net foreign institutional investment inflows (FII) which have gone down over 5 times. Against a net inflow of $11 billion in 2010 (until August 4, 2010), the FII figure for the same period this year is $2.14 billion.Uncertainties
would surely draw investors to promising emerging economies, as they have been lulled in the past, but this time around the element of caution will be much greater. At a point when the Reserve Bank of India
has raised its guns to fight inflation at the cost of growth, the signal is clear - growth can wait. But investors look for stable investment destinations, and the Indian markets are not promising to them.
In the short term, navigating markets will be a difficult task, says a Barclays Capital report. "In a couple of months' time, the world should look similar to where it was in early Q2 (second quarter of 2011). In other words, the US and euro area economies will be struggling to gain traction, while for emerging economies (particularly in Asia) the main challenge will be inflation, with both rates and forex policy pointing to currency appreciation, the report adds.
To sum up, volatility is the name of the game. Though the cycles might not be too long.