Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Dow Stock Market Trend Forecast Update - 21st Sep 19
Is Stock Market Price Revaluation Event About To Happen? - 21st Sep 19
Gold Leads, Will the Rest Follow? - 21st Sep 19
Are Cowboys Really Dreaming of... Electric Trucks? - 21st Sep 19
Gold among Negative-Yielding Bonds - 20th Sep 19
Panicky Fed Flooding Overnight Markets with Cash - 20th Sep 19
Uber Stock Price Will Crash on November 6 - 20th Sep 19
Semiconductor Stocks Sector Market & Economic Leader - 20th Sep 19
Learning Artificial Intelligence - What is a Neural Network? - 20th Sep 19
Precious Metals Setting Up Another Momentum Base/Bottom - 20th Sep 19
Small Marketing Budget? No Problem! - 20th Sep 19
The Many Forex Trading Opportunities the Fed Day Has Dealt Us - 19th Sep 19
Fed Cuts Interest Rates and Gold Drops. Again - 19th Sep 19
Silver Still Cheap Relative to Gold, Trend Forecast Update Video - 19th Sep 19
Baby Boomers Are the Worst Investors in the World - 19th Sep 19
Your $1,229 FREE Tticket to Elliott Market Analysis & Trading Set-ups - 19th Sep 19
Is The Stock Market Other Shoe About To Drop With Fed News? - 19th Sep 19
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Warning for India Stock Market Global Investors

Stock-Markets / India Jul 14, 2009 - 05:18 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: When India unveiled its annual budget on July 6, it immediately caused a sharp drop in the rupee, as well as a 5.8% decline in the benchmark BSE Sensex stock index that had soared 55% so far this year.


The sharp reaction wasn’t a surprise: Since it including nothing about privatization, and outlined a deficit that widens to dangerous levels, the budget was nothing but bad news for investors.

Russia, by virtue of its myriad economic travails and poor overall performance, faces an equally dour near-term outlook. Given those two laggards, is it possible that the Goldman Sachs Group Inc. (NYSE: GS) “BRIC” group of exciting emerging-market players will narrow the to the “BC” – meaning investors should focus their attentions on Brazil and China alone?

Insights on India’s Economic Travails

Investors had hoped that the thumping electoral victory for the Congress Party in May would have opened the way for further financial reform and privatization, but new Finance Minister Pranab Mukherjee is an old Congress Party warhorse left over from the days of state control. Mukherjee was previously finance minister under Indira Gandhi in 1982-84, a period of state-controlled economy and sluggish economic growth that took place well before the Indian economic liberalization began in 1991.

The new budget confirmed that investors’ hopes of the new Congress-led government are likely to be dashed. It increased the deficit further – to 6.8% of gross domestic product (GDP) – raised state spending by a startling 36%, and boosted subsidies for food and petrol by an astonishing 55%. Since the budget also increased the target for state and local government budget deficits – to 4% of GDP – an overall Indian state sector deficit in excess of 10% of GDP seems assured.

India isn’t the United States, in which such large deficits can easily be financed – or at least can be for a time. Moody’s Investors Service (NYSE: MCO) rates India’s domestic debt as a Ba2 – a “junk” rating – and the country is already running a significant balance-of-payments deficit.

India has foreign-exchange reserves of $223 billion, so one year of a $95 billion budget deficit (plus about another $60 billion at the state level) can probably be financed, but if there was an overrun – not impossible, particularly if organic economic growth does not resume – the strain on India’s foreign exchange reserves would probably become unbearable.

Most important, such large budget deficits might well lead to a substantial “crowding out” effect in the Indian domestic market, in which Indian businesses find it difficult to raise money. Unlike in the United States, the Reserve Bank of India cannot just buy government bonds to prop up the market; Indian inflation is already running at 8.7%, and any “monetization” of the government deficit by the central bank would push it well into double digits.

India-watchers have seen this move before – periodically, until reform began in 1991, and speeded up after 1998. From 1947 to 1991, whenever economic growth picked up, the government would attempt to spend all the extra money that was being generated by the tax system and the deficit would become impossible to finance.

India’s economic sluggishness in the period to 1990 – when economic growth peaked at around 3%, or 1% per capita, while other Asian countries were racing ahead – actually spawned a controversial and derogatory term, known as the “Hindu rate of growth,” which spawned even more angst when it was attributed to cultural difficulties.

With the growth of the last two decades, we now know this to be nonsense: India can perfectly well grow as rapidly as China if it wants to. The obstacle is India’s government, and that’s an impediment that’s not going to disappear anytime soon.

The Outlook for Stocks

The implications of all this for Indian stocks are dire. If India’s government runs budget deficits that burden the capital markets, and economic growth slows sharply, domestic stock prices are likely to be affected accordingly.

India’s stock market, currently trading at a Price/Earnings (P/E) ratio in excess of 20, will be devalued until it has a P/E like Turkey (8.2) or Sri Lanka (7.7). In such a situation, the rupee would also be weak (it has already dropped by 10% against the dollar in the last year) giving U.S. investors doubly painful losses, perhaps even in the range of 50% to 60% from current levels – which already are 30% below the January 2008 peak. Only major exporting companies with liquidity sufficient to fund their operations without raising new domestic capital would flourish.

The world is thus in a position in which two of its great growth engines – India and Russia – are likely to run into increasing difficulties. Fortunately a third, Brazil, has been growing much better in the last few years, with policies of high domestic interest rates and contained budget deficits that have allowed its resources sector to flourish.

And while Western economies remain mired in recession, global growth is currently excessively dependent on China, the largest emerging market of them all.

[Editor's Note: When it comes to global investing, longtime market guru Martin Hutchinson is one of the very best – because he knows the markets firsthand. After years of advising government finance ministers, crafting deals with global investment banks, and analyzing the world's financial markets, Hutchinson has used his creative insights to create a trading service for savvy investors.

The Permanent Wealth Invesor assembles high-yielding dividend stocks, profit plays on gold and specially designated "Alpha-Dog" stocks into high-income/high-return portfolios for subscribers. Hutchinson's strategy is tailor-made for periods of market uncertainty, during which investors all too often go completely to cash - only to miss some of the biggest market returns in history when market sentiment turns positive. But it can work in virtually every market environment.

To find out about this strategy - or Hutchinson's new service, The Permanent Wealth Investor - please just Click Here.]

Money Morning/The Money Map Report

©2009 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules