Sympathy for the devil
The devil, to be sure, lies in the US market and it is only but natural that all global markets tremble as the US is drawn to its knees, writes Udayan Mukherjee.business Updated: Aug 13, 2007 03:56 IST
The last fortnight has seen all global markets move in tune with the US market. As bad news from the housing market continued to trigger repeated sell-offs in the Dow Jones index, most emerging markets crashed in sync. I call it the "sympathy for the devil" syndrome. The devil, to be sure, lies in the US market and it is only but natural that all global markets tremble as the US is drawn to its knees. After all, it is the empire. Or used to be. In light of the events of the last two weeks it may even be tempting to say that the decoupling of emerging markets with the US is dead; we are back to mimicking the biggest market in the world. I would argue strongly against it.
This is not to suggest that this "sympathy" has played itself out. This is the first proper shock that global markets have felt in more than a year, so it is only likely that there will be some more synchronised damage as the US comes to terms with its housing collapse. As is evident, market technicals reign supreme in the short term. To my mind, the risk to emerging markets like ours is not whether the sub-prime problems trickle down here or even whether the US economy is slowing down to near recessionary conditions. It is whether a lot of liquidity becomes shy of emerging market investing and this risk aversion lasts for a protracted period of time. The role of money flows in determining market movements cannot be undermined, however much the fundamental analysts may like to believe. To this, I would submit that liquidity may recoil to begin with, out of sympathy to the US woes, but it will eventually come back to chase growth and performance where it exists; in emerging markets across the world like India. This is our time in the sun, not even the US can deny us that.
Indeed, this may be a seminal point in the history of global markets. The US has been on the decline for some time now, even as emerging market economies power ahead, a fact underscored by the relative outperformance of emerging markets over the past year. This gap will only get wider. The transition cannot be easy though. It is a tectonic shift and will take some doing. Eventually, like water finds its own level, money will seek, and find, growth. It may take time but it will. The trick for investors is not to work themselves into a sweat over US economic issues that are difficult to analyse. To ignore them would be a folly, yet to recognise that the connection is essentially a liquidity-driven one is important. Else one will never be able to capitalise on the opportunities provided by this turmoil. Any major pain inflicted by the US problems on emerging markets, particularly like ours that do not depend much on the US economy anyway, could simply be a big buying opportunity. It will not seem like that with all the noise that will inevitably surround the collapse of the US, as has been the case this fortnight. I am no expert on the US economy but it is easy to see that the "devil" is in big trouble. More and more symptoms are showing up as the ailing body lurches towards the inevitable. While it is appropriate to make a few clucking noises, we should not overdo the "sympathy" bit. Life will carry one, with or without the US.
(The writer is Executive Editor, CNBC-TV 18)