Source:Bloomberg & Moneyweek
Equity markets globally have turned highly volatile due to various factors that are often causing panic selling among investors. Falling dollar, volatile oil and bullion markets and surge in commodities prices have created opportunistic trading options for the investors, but in-turn might have increased market volatility. Alternate bouts of buying and selling have seen some indexes shooting high and crashing low in recent episodes. With fears of a US recession and continuous credit market worries, we have seen an upfront in risk aversion entailing demand in risk mitigation products. Emerging markets are trying their best to insulate themselves from a likely possible US downturn and the ongoing turmoil in the US economy fueled by subprime have affected domestic proceedings in some emerging markets, like India, China. And even after some market swinging, fundamental valuations do not appear to be cheap where investors might take some shelter. Year 2007 has seen the triumph of emerging markets over developed markets. In other words, we can say developed markets have nearly 'submerged' under the EM performances in the last few years. One data (above pic) from Bloomberg compiled by moneyweek.com shows the EM performances in 2007; In this scenario, one would ask ‘How well the emerging markets perform?’ Is it an indication of submerging economies bowing to high growth emerging markets? Do US investors need more international diversifications of their assets? What asset classes are the market gems? Where will the oil go and how about the commodities?
Commodities.
Gold. Yes, it’s a ‘gold rush’ again, but not in California this time. It’s a financial instrument based on bullion markets, the Gold exchange traded fund. With gold prices expected to touch US$950-1000/ounce this year due to falling US dollar, it’s a rush hour again for gold. One can invest in gold funds, G-ETFs, or simply buy gold. Gold is considered as a ‘safe haven’ for investors due to the weakening US economy and world currency (US$). Bullish trend is likely to continue this year on the back-drop of a weakening US$ and some investors see it as a good hedging instrument. The same story goes for Silver too, where ongoing weakness, high oil prices and fear of US slowdown is pushing silver prices higher. Platinum is also expected to do well within this parameter’s. Thus, one can interpret that gold and its cousin, Silver is moving on the unit track.
In the Indian scenario the Sebi has come up with liberalized platform for developing the onshore derivatives market in line with the increasing liquidity chasing the stock markets. Mini- contracts on the equity indexes and short-selling in mutual funds are likely to get a nod from the Sebi this year. Also, options on futures and bond indices, volatility trading, forex F&O and ETF products are already in the line. And with the REIT s to hit the market, may be next year or so, their will be more diversification options and financial instruments to trade upon. While FII’s are awaiting more clarifications from Sebi on PN notes and avenues to invest in India growth story, its likely that more money will be chasing the Indian hot stocks which the companies have good dividend payment track records, high growth story and better fundamentals. Indian markets are among few other emerging markets which are trading at a premium. Though till Nov.23, FII’s were the net sellers of Indian equities-Rs.173.40 crore, we saw buying spree by the domestic mutual funds and fund houses who, apart from their domestic exposure are looking for tie-ups with their foreign peers for raising offshore funds In 2007, sectors that performed well are the FMCG, Oil & Gas, PSU stocks among few. There is a tremendous growth prospect for the Indian banking industry which has been foraying for overseas expansion. Strategic planning of Indian banks to expand overseas and get business out of there is likely to drive in for some consolidations in the banking industry.
Japan has been a dismal performer in terms of equity market returns, with Nikkie-225 falling 11% in 2007, as against 5 year bull run. Sustaining deflation and Yen appreciation with falling asset prices and real estate dry-up did match the US subprime debacle and fear of a recession, as US economy might really face one such stagflation situation same as what Japan has been through. Though US and Japan, being the world's largest and second largest economy might see some rebound as market downturns can bring down valuation levels within purview, according to some analysts.
With growing demand for Brent and crude oil from China, India, Brazil and other fast growing economies, it seems that oil will boil and roil the markets, and any supply constraint could see the oil spiraling above US$110-120 in 2008, if oil price fails to moderate early this year, or if the dollar weakens further, say by another 5-7%.
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