It’s not supposed to be easy

The US Fed meet came and went. The expectations ran high and there was no outcome. What should an investor make sense of this much-hyped event? Firstly, events don’t solve the problems of economies. They only set the direction for the future. A central bank is not a problem-solver of economies. It only helps contain the problems from growing worse. It is political will that is the primary driver of economic progress. Without political will, no central bank can solve economic problems. And, when Central banks play ball with governments that lack political will, the consequences can be disastrous as 2008 taught us.

Fortunately, we aren’t in such a situation in the USA. Importantly, the situation in India is significantly better. The political will is ample. And, the central banker is independent minded. It is not adequate if we have political will and a prudent central bank in our country. We also need a lot to change on the ground in several other nations. Only then can we safely say that global markets have put their problems behind them. For the moment, that looks a distant dream. In the interim, it is certain that the US is charting a monetary path very different from what the world would like it to. It plans to raise interest rates and has amply clarified its intent. The question is only when, not if. This would mean that global investment flows will seek the safe haven of the US markets.

The first flight of capital will be one way towards the US from different markets. This will happen almost seamlessly in the coming months. EM’s as an investment choice will get downgraded. When viewed as a basket, there are way too many problems in EM. The risk reward in EM investing clearly shows a sell. FII’s will not act differently in such situations and every rally will get sold into. Only after one rate hike or two will they see a need to rebalance their investments and could look at specific nations within the EM basket. That phase should favour resumption of investment flows into India. Till then, it is a slow grinding market where sellers will dump their holdings in basket selling of index funds. Volatility could be higher and domestic investors could panic if they aren’t adequately prepared. Loads of patience and lots of capital must be invested in India over the next quarter. Those who play it right will be outliers.

 

The stock markets choose between crowdsourcing fear and crowd funding greed. In the end, it is the crowd’s game.

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