Global Equity Markets: escape From Sub Prime

by : Sandy Chatterjee

The reactions in the global equity markets due to the Fed's 50 bps rate cut on 18th August and 25bps cut subsequently in late September 18th were appealing to both the investor community as well as to the financial institutions across the world. Investment bankers, credit originators as well as lenders sought relief from the credit squeeze that soon followed the US sub prime debacle.

Apart from the rate cut, Central Bankers pumped in huge money ($350 billion) into the system to temporarily tackle and contain the credit crunch thus providing more liquidity to the capital markets. 'Escape from Sub prime' has been one of the most sought after policy of some major lenders, bankers and NBFC's who have substantial
exposure to the US subprime market collapse. It is on this context that analysts as well as the
policy makers have been much worried about an US economic slowdown, since housing market collapse in the US might lead to a full blown economic downturn due to co-related consumer expenditures. More housing starts and home sales mean more household goods per capita consumption, more people buying household appliances, accessories and others. While less credit in the system spells doom both for the auto industry which thrives on car loans based on easy credits as well as home loan originations that boost the housing and real estate markets.

Investors, anticipating US market trouble have sought shelter elsewhere where they have been parking their money in the Emerging Markets that has been consistently showing remarkable and sustained growth prospect. Though the market shake-off due to the US impact did pull down the emerging equity markets, the strong export driven fast paced developing nations are in-fact in their finest economic tunes since the last Asian Financial crisis in 1997.Quite equally the remarkable economic expansion and financial reforms undertaken by two of the world's most fastest developing nations-China and India boasting 8-10% on average GDP growth rate.

Analysts feel much of the ill-effects due to the subprime crisis could be well cushioned by emerging Asian nations. Consumer demand and
expenditure are quite high on account of the newfound wealth in these countries, with the others joining the bandwagon, particularly Russia, Brazil, South Africa, India, China
(BRICS), Hong Kong, South Korea and Taipei . The other Asian countries like Thailand, Malaysia, Singapore and Indonesia, (ASEAN) nations have been performing well within their macroeconomic parameters.

Analyst might have had a view that the growing Asian economy might buffer any major US downturn, but since US still remains the major importer from these countries, and being the world's largest economy (US$13.5 trillion), followed by Japan (US$4.5 trillion) which has been into a 'deflationary stagflation' phase since the late 90's, concerns about export slowdown to these major partners lingering amongst the market participants. A further credit market tightening could jeopardize the corporate mega deals and stall major expansion programs. Fund raising may be hit hard if investor sentiments are towed down with increased risk aversion.

Few investors would like to lose money and in-fact is likely to seek better investment returns when the markets are performing well. Foreign investments into equity markets have increased considerably in the emerging markets where good corporate growth and higher returns are attracting global investors pouring liquidity into the stock markets. These factors have created in-effect, asset price rise and stock market bubbles in several countries like China and India. Markets are reacting to any global clues, either from the Fed, major Central Banks or the political changes affecting monetary and economic policies of such countries.

On the global currency frontier, continued weakening of the US dollar against the major traded currencies like euro, pound, Canadian dollar and the yen has been creating much debate among currency strategists whether to let the US dollar find its own ground or to mediate. Analysts, according to Bloomberg, also have a view that if the 'Greenback' is allowed to fall too rapidly then investors would dumb the dollar backed assets. In-fact the dollar has depreciated much to the extent of 10% against some currencies like the euro and the Indian Rupee, as recently noted by Asia-Pacific Head, Mark Mathews of Merrill Lynch. The emerging market currencies also appreciated considerably on account of huge capital inflows and the rise in demand for their domestic assets and currencies from overseas

With the ever increasing importance of Renminbi as a major Asian currency, the US dollar seems to have been taking a back seat. Though, it has been not so, according to currency strategists, since the US is still the largest market for investing, operating business and the biggest export market for the emerging economies.

Volatility in the global stock markets on the aftermath of the US subprime has increased since the housing market slowdown affected the mortgage backed bonds considerably. These bonds based on subprime loans, have been downgraded by S&P and Moody's rating services since investors have been dumping these MBS bonds on fear of further losses. Many banks and financial institutions have bought these bonds as their portfolios to be traded on the stock markets across the board. When the borrowers started defaulting on their home loans, investors moved away from these bonds, reducing their demands among investors with mounting losses reported by major hedge funds houses and investment banks who own these bonds, thus accounting huge losses on these Asset Backed Securities (ABS).

The reports of these exposures, somewhat around USD 1 trillion brought down investor sentiments and in turn decreased the investors risk appetites. Stock markets across the globe reacted sharply whenever losses related to the subprime were reported, with markets crashing down wiping out substantial investor wealth (USD2.5 trillion) of the US equity market value. Elsewhere, markets have also tasted downturns along with some big rallies and bull runs, particularly in the emerging markets like India, China and Hong Kong ,Nikkie,etc. In fact, the Hang Seng has gained as much as it has lost since this month when it touched 31,000 point mark, before losing around 10% of its value within a month and now trading at 27,000 points.

The BSE (Sensex)of India has also been through biggest bull market rallies when it touched the 20,000 points for the first time. The China SCI 300 has been one such biggest stock market bubble as enormous capital is chasing the Shanghai stock exchange. The Hong Kong provides a big platform for raising capital and issuing IPO's, as we have noticed some of the biggest IPO's being issued here by China's ICBC, CCB, PetroChina,,, etc. It seems corporate sectors in India and China are at there best times for issuing IPO's. Recently PetroChina, according to, has become the world's first company to reach a market capitalization of USD 1 trillion, and with this, being crowned as the largest listed company.

China has also been reported to have 106 billionaires, up from only 15 last year, according to Shanghai-based Hurun Report published in Bloomberg. India, having somewhat similar good story, has been reported to having three of the world's top 10 richest individuals in the Forbes's list.

In the Indian scenario, FII's are bidding for IPO's to get a pie of the bustling Indian capital markets. There has been much concern from the Sebi to counter the capital inflow into the equity markets via PN route, (an alternative route for unregistered investors to enter the capital markets). Policy makers are worried about too much money chasing too few stocks which might create stock market and asset price bubble. Inflation is well under control, around 3.5%, but there always remains the fear of an inflationary pressure due to the crude oil price shock- currently trading near $100 per barrel at the Nymex. It seems that oil has been moving the markets to some extent as concerns about supply constraint and Iran crisis looms high, and a supply cut from Mexican Gulf due to a hurricane has made the situation worst.

Recent oil price shock might cast a bad spell on the developing nations who import crude oil at such high price, and the accompanying inflation could push the prices of commodities still higher in those countries if effective monetary policy regime and economic reforms are not initiated. The currency collapse of Zimbabwe, where there
has been a situation of hyperinflation as prices are rising every other minute, reserves exhausted, shortage of essential commodities and lack of effective monetary policy has resulted in an alarming situation.

Whereas, some equity markets in the African subcontinent, according to, giving attractive returns on investments in 2005- as high as 116% (Zambia) 81% (Uganda), investors see this as a major opportunity to foray into the untapped resources in Africa and bring in liquid
investments to mobilize those untapped resources.

Overall, the Asian emerging markets and their counterparts are doing well, lest the subprime crisis, where one has to look out for possible ways to tackle the failing mortgage bonds and the investment community's exposure to such. Any cues from the US could affect the markets since equity markets today are have become much sensitive to any news or information's flowing to the markets that are enough to tickle the market sentiments.

Sources: Bloomberg, Economic Times, Xinhua,Rueter