This is a war market. There is absolutely no visibility about the future, and events unfolding in our neighbourhood could get very scary indeed. And these preparations for war are happening at a time when the world economy is deep in trouble. Small wonder that markets throughout the world are falling off a cliff.
Everything depends on the timing and scale of the US retaliation. If the whole thing gets over fast, and is successful, the markets may recoup some lost ground, but that scenario seems very unlikely at the moment, with all the US politicians warning of a long-drawn-out offensive.
Weakness in the world economy continues to deepen, as the US economy, the engine for the global economy in the last few years, slips into recession. The US economy was already fragile before the terrorist attacks, but as Fed chairman Alan Greenspan has said, consumer confidence has been affected since then.
The mounting layoffs in the airline, entertainment and hotel industries will add to the unemployment rate, which had been edging up even before the attacks. Consumer spending is bound to suffer.
So far, much of the mayhem in the US economy has been on account of the curtailment in business spending, but consumer spending had held up rather well, spurred by the reduction in interest rates. But at some point, the loss of jobs and the uncertainty even among the employed will have its effect on spending, reinforcing the downturn in demand. Uncertainty, as Greenspan has pointed out, is bad not just for the markets, but also for investment.
To be sure, India continues to be relatively insulated from the rest of the world economy. Expectations from this year's monsoons have been rather low-key, a result of worries on whether it would really affect purchasing power all that much. There is little doubt, however, that agricultural production, and consequently rural demand, will be higher in the post-monsoon months.
There is also a fair chance that the government's food-for-work and road building programmes will finally get translated into action, and this too will see a rise in rural income. Beyond agriculture, however, there are few bright spots. Exports will undoubtedly be severely affected, given the slowdown in world trade. Disinvestment will be badly hit---who on earth will want Air India now?
UNCTAD has projected that FDI for this year will fall dramatically. Overcapacity in industry rules out any increase in private investment. The outlook on oil prices seems to be getting better, given the lack of demand.
So far as the markets are concerned, retrenchment by the FIIs, as a consequence of redemptions in the US markets, are a cause for concern. Data and anecdotal evidence points to big redemptions. Much of the selling in the US markets has been institutional.
In 1998, for instance, when Russia defaulted on obligations and the S&P 500 fell 10 per cent in the third quarter, more than 80 per cent of fund investors held on to all their shares. Whether you call it buy-and-hold investing or just plain inertia, redemptions were not as big a threat as made out to be.
But this is not 1998, when the US economy was booming. Redemptions during the four days ended September 24 were $11 billion, according to funds tracker Trim Tabs. Also, given the fact that in the Indian markets, it has been the FIIs which have been propping up a very thin market, any selling by the FIIs affects the market.
Uncertainty about the UTI continues to be a negative factor, particularly now that the markets are plumbing new depths. It seems very unlikely that the UTI will be able to declare a decent NAV on January 1, 2002.
There's also another uncertainty----while world attention was focused on the terrorist attacks, China has cleared its last hurdle to joining the WTO, and will be admitted to the organisation soon. That would mean even more FDI flowing into China, while Chinese goods will have easier access to markets everywhere. India could be affected, although the depreciation in the value of the rupee will effectively raise the protective barrier for domestic industry.
However, once the immediate tension about the impending retaliation by the US is over, and there is some visibility about the way events will unfold, things need not look all that bad. For a start, the attacks have led to a huge fiscal and monetary stimulus by the US Fed, and many central banks throughout the world have reduced interest rates.
And any improvement to the US economy and stocks will have an impact on Indian tech stocks. But all that's in the long-term. But what if, as is very likely, there is no clear cut victory over terrorism, despite all the war rhetoric?
Will that not lead to an end of the current honeymoon with Bush? How long will it be possible to sustain the current burst of patriotism, amidst all the layoffs? If Bush is seen to be ineffective, there's every chance he may end up as a lame duck President. That could be bad for tech stocks, a year down the line.
