The last few weeks have been very volatile. And the August 24th global market crash has shaken the confidence and patience of the biggest equity bulls. The Indian market fell sharply with the Nifty/Sensex crashing by almost 6% in a day and mid and small cap indices falling even more.
The obvious question - what is happening? Where does this end? What should an investor do?
In hindsight it is easy to decipher the reasons behind the fall. The Chinese stock market; China's currency devaluation leading to a contagion effect to other emerging market currencies; collapse of commodities; and eventually a global risk-off trade. India, initially was very resilient. However, it finally gave way because of the huge outperformance vis-à-vis its emerging market peers and we had yet another "Black Monday".
Many are even calling the current environment as it is 2008-09 type of scenario!
We surely and confidently believe it is not even close to that. This sharp correction is more China led and will, at worst, impact global markets for a short period of time. Some emerging markets had fundamental problems and, therefore, are under severe pressure. Commodities are under pressure and economies which are commodity dependent are at the epicenter of this fall.
The reasons why we strongly believe that we are unlikely to be headed for a global recession:
- Growth in world’s two biggest regions, namely the United States and the European Union remains steady.
- While manufacturing is weak, the service sector globally is performing very well. In fact, even the Chinese service sector is doing well.
- The recent oil price decline is supportive for most major economies, including a number of emerging markets.
- Global interest rates remaining close to record low levels and monetary easing by major central banks will extend further.
- Lastly, regions where growth is under pressure, market valuations are comparable to previous extreme bear markets (e.g. Brazil, Russia, Indonesia).
As a matter of fact, India's attractiveness has increased owing to these global developments. Commodities have been more severely hit and that is extremely positive for India.
Next: Why we believe India is in a sweet spot compared to the rest of the world.
