THE DRAGON BREATHES FIRE!

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Last week’s devaluation by China left the Yuan about 3% weaker against the dollar. This decision was the largest Yuan depreciation in almost 20 years; and the ripples are being felt across the globe. How does this affect the rest of the world?

  1. GDP : China’s currency devaluation is being seen as a misery signal from Beijing policymakers. This means that the world’s 2nd largest economy may be far weaker than the official 7% GDP growth.
  1. Neighbours : The currency is one of the determinant of how much the country’s goods will cost when they reach the global markets: Chinese wages, cost of raw materials and transport have been rising over a period of time, making its products less competitive. However, due to the devalued Yuan, China’s Asian rivals, such as Malaysia, Taiwan, Singapore, Indonesia and South Korea, will now face stiffer competition.
  1. Lower Commodity Prices – Cheaper Fuel : China’s unquenchable demand for natural resources has been a key factor supporting the price of oil and other commodities in recent years. So, oil prices will face pressure if this Chinese downturn continues. Global oil prices declined last week following China’s move, dipping back below $45 a barrel. In coming months, weak Chinese demand could force down the cost of many commodities, from oil to iron ore.

 

  1. US & UK : Central banks in the US and the UK have been issuing guidance for few months that, with growth strengthening, they are preparing to start pushing up interest rates. However, a cheaper Yuan will mean cheaper imports into the US & UK, leading to a deflationary situation, where inflation is already near zero in the US & UK; and this could delay a rate hike.
  1. Greece : The most vulnerable countries in such situations, will be those that are debt heavy – because while wages, costs and profits fall in a deflationary period, the value of debts remains fixed, making them more difficult to pay interest on. Greece is already suffering from political instability, high unemployment and deflation; and if it worsens, that will only make its humungous debts, worth more than 2.5 times of the size of its economy – harder to service.
  1. Currency Wars : If Beijing allows the Yuan to decline further in coming months, it could increase trade tensions between the world’s biggest trading countries, creating a face off in a “beggar-thy-neighbour” battle to seize the largest possible share of global consumer demand.

 

What this means for India?

 

  • India has high foreign ownership in equity markets, which may result in further volatility in near term.

 

  • India has a stable government, a pro-active RBI Governor and strong regulators keeping checks and balances; hence it looks the most promising and better poised country among its Asian peers.

 

  • The Current Account Deficit (CAD) is 1.9% of GDP ($18 billion) in the 1st half of the year and is estimated to be 1.5% of GDP for FY 16. In comparison, we have foreign exchange reserves to the tune of ~ $350 billion.

 

  • India imports ~ 1.4 billion barrels of oil per annum. A $1 decrease in oil prices translates to a decrease of $1.4 billion decrease in imports. Decrease in oil prices from $100 to $46 has resulted into huge savings for our country.

 

  • The Indian Equity Markets have seen a 6% fall, 19 times; but have also seen a 6% rise for as many as 24 times.

 

  • Indians are loss averse. The losses you may see today are only notional losses and not real.

 

  • We suggest to increase the SIP amounts and add lumpsum to equities, keeping in mind your asset allocation.

 

 “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

― Warren Buffett

Disclaimer: This document is meant for private circulation only. Sapient Wealth Advisors & Brokers Pvt. Ltd has taken due care while compiling this report. All information/opinion contained/expressed herein above by SWABPL has been based upon information available to the public and the sources, we believe, to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Readers should use this information at their own risk. SWABPL shall not be held responsible for any direct or indirect loss caused by relying on this information.

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