Stock markets love growth. When economies grow, the stock prices stay up. As much as markets love growth, the lack of growth gives the jitters to markets. The current worries in the developed markets in USA and Europe are centered around the lack of growth in their economies. Growth needs loads of capital. The capital for growth of nations comes from two sources- Investment and credit. Investment comes from domestic savings and overseas investors. Credit comes from the banks.
USA and Europe have strong reasons to worry on the growth front. The reasons are simple. In the USA, citizens spend more than they earn. So they don’t have real savings. They borrow to spend. They also borrow to invest. This makes their ability to invest further weak and suspect. America’s investments need to come from outside. Domestic investors are carrying too much debt and they need to reduce their borrowings over time before they can think of investing.
Borrowing to spend and invest are both extremely risky. When interest rates are low, the citizens find it easy to meet interest commitments. But, if interest rates rise, then it is inevitable that investors will be squeezed to meet interest payments. That will weaken their ability to spend more. Investing further will be near impossible. This prospect is a growing worry in America and Europe. Investors are spending less and trying to reduce their liabilities before inflation begins to hurt them. This lowering of spending is hurting growth.
Nobody believes the Central bankers and policy makers who try to reassure them that interest rates will remain low. Everybody wants to mend their financial state and reduce their borrowings over a period of time. Nobody believes that their Governments can bail them out if they get stuck with too much of loans. The falling growth in the USA and Europe is attributable partly to the lack of consumer confidence and lower spending.
Let us think of our own ability to spend. India is a country where spending is largely driven by real earnings. Indians spend only what they earn. They borrow very little. Very few Indians borrow to spend. Most Indians save a good part of their earnings. It is amply clear that spending in India isn’t likely to be impacted too much. We may actually see an increase in spending as the buying power of rural India is growth rapidly. The world is grappling to find money to spend. On the contrary , India doesn’t have that problem. Actually, we are in a sweet spot. We can sustain our spending and even grow it.
Clearly this is good news for Indian companies and our stock market. The long term view can only be positive.