By Ruma Dubey

Yesterday, the Cabinet approved FDI in Railways and Defence. It was something we all knew but the happening was celebrated not with overall enthusiasm in the market with only select stocks in the beneficiary sectors rising. There remained a pall of gloom or shall we say, impending doom. And this was thanks to Raghuram Rajan, the same person who helped pep up the market on many occasions. Today, the gloom went on to permeate an air of doom and there was a sense of quiet fright. There is no panic button pressed yet, but an air of uncertainty has come in.

Yesterday, we woke up to various newspapers and websites quoting Rajan’s interview in Central Banking Journal. Rajan had warned previously also, stating that the emerging markets were indeed vulnerable to the big shifts in the capital flows from the rich nations. In this recent interview, he once again reiterated the same viewpoint, only more vociferously, saying that “global markets are at risk of a crash should investors start bailing out of risky assets created by the loose monetary policies of developed economies.”  He was bearish enough to compare it to the markets in 1930 which was marked by the Great Depression.

That was enough to send jitters down the spine of Dalal Street. Rajan said that in 1930, currency devaluation was the tool to combat the crisis and this time around, it is monetary policy easing. He said that a lack of coordination between the policy makers can create spillover which could spiral out of control. With most central banks yet to correct the damage caused by the 2008 crisis, there could be fresh turbulence. What sounded more ominous is that he said we stood a greater chance of having another crash especially when the world today is not capable of bearing the cost. He said the overvaluation of the Euro was a clear symptom of major imbalances crippling the financial markets of the world.

Rajan’s voice about an impending crash is not a lone voice. The usual ‘bears’ of the world have been warning us consistently and persistently but in good times, who pays attention to a party pooper?  

The emperor of all bears, Nouriel Roubini, who is known as Dr.Doom was surprisingly, very unusual for his behavior, bullish in May’14. He is of the opinion that the risks to global economy had receded and he talked exactly opposite of what Rajan said – improving European economy and stronger Euro. In a rare account, he actually praised the Federal Reserve for its unconventional monetary policy, which he had forecast would last for a few more years and would support the equity markets. But then in June, he said, “while there's no sign of a bubble in the stock market now, the concern is that one will inflate if the Fed falls behind the curve”. All this was before the rising geopolitical tensions; we now wait to hear his views post this.

Another big bear, Marc Faber and two days ago, he was quoted saying, “I think somewhere down the line we will have a massive wealth destruction. I would say that well-to-do people may lose up to 50% of their total wealth.”He lays the blame fair and square on Ben Bernanke for printing so much money, which has gone on to plug the leak on the tap but not cured the hole in the bucket. Another well know economist Peter Schiff, the CEO of Euro Pacific Capital, said that the stock market collapse we experienced in 2008 wasn’t the real crash. The real crash is coming. Real estate mogul, Donald Trump too has issued a warning, voicing concern over debt and he says that USA will soon be staring hard at a debt in the range of $21-22 trillion and expects a downgrade soon.

Actually, what we all are experiencing in a complete deterioration in value of all assets. Look at the market itself, if earlier a good stock with a PE of around 20 was considered to a good valuation, today the same at PEs of over 100. The cost of acquisition vis-à-vis the returns has gone down dramatically.  Ditto for realty where a property for Rs.4-5 crore does not give the kind of returns which such can even go on to service the debt taken. Thus all around, we are seeing a fall in the returns which one can get from assets. This in turn means, the supply of money is a lot – too much money chasing too little assets. The QE easing has been happening gradually and it will come to an end by October. The real risk is when interest rates in USA is increased, when we could see some flight of capital from emerging economies.

For India, yes, these voice of doom are worrisome but forewarned is forearmed. We have this information now so that means better to stop reckless trading and look for opportunities as an investor. The entire global economy is on a flux and at this time, best to wait it out. We are insulated and the floor might not fall from under our feet. RBI remains vigilant. But we need to be vigilant as well and not build up huge trading positions. Frankly, if the markets had been rising today, no one would have paid even a wee bit of attention to these voices.

When there are so many voice of cocnern, it would be foolhardy to brush them all aside and say, “nothing will happen.” Best to be cautious till we see some signs of this current air of disquiet settling down a bit.