Emerging Markets Are Stifling Confidence

India at the moment has a currency on record lows, a widening deficit, slow growth and inflation is picking up. Trying to manage this set of economic woes is worrying and some argue that India is on the edge of a crisis. The Government, daily, continues to put in place monetary and fiscal measures to try and support the economy, however as the Sensex stock index drops, already down 10% this last month, investors are becoming increasingly nervous and foreign investors are fleeing the country in droves. As the crisis develops, and more look to flee, the government may find itself in a situation similar to the 1991 crises where it had to airlift bullion reserves to the IMF as pledges against loans to help to resolve its then balance of payments issue. The Indian economy, given its imports outweigh its exports, relies on foreign capital to help balance its book. However, as the rupee collapses, investors struggle to invest in a country whose currency that has already lost about 25% of its value. A policy paralysis emerges which, if it cannot be resolved domestically, will require outside assistance, as in 1991. The problems we feel is that the economic woes and policy dilemmas the RBI is facing in India, namely a weak currency, burgeoning current account deficit and slow growth coupled with inflation are spreading towards other Asian economies such as  Indonesia and Thailand. This is the inflationary aspect we have talked about several times before which presents a real problem in terms of how to it can be managed. How do you achieve growth in an inflationary environment?

In Thailand, South East Asia’s second largest economy has just slipped into a recession, the Thai baht has slumped to a one year low and Thailand SET Index has dropped 5.3% in the last two trading days. Like Indonesia, exports are slow but further domestic demand has slumped as infrastructure spending, due to political issues, has been put on hold. The government, which is seen as the main catalyst for economic stability, has stalled massive infrastructure projects, adding sentiment to an already weak domestic picture and an economy suffering slow export growth. It is interesting to see the speed in the turnaround for an economy which last year reported a return of 6% to an economy that last quarter reported a contraction of 1.7%. And for this quarter read a further contraction of 0.3%. 

So with several Asian countries feeling the pinch and business confidence in economies remaining weak it will be interesting to see what the FOMC minutes reveal. If Bernanke is true to his word on the fragile state of the global economy we expect more debate on the need for stimulus to be kept up, if not for the local economy, but for the peripheral economies which we have argued remain in a vulnerable state. We do suspect that any tapering will be small and in reality expect the Fed to use any reduction as a monetary tool down the track to help it manage growth and inflation. Remember, the Fed needs to consider that any commencement of tapering in our mind is a green light for corporates to start to tap into 7.2 trillion of reserves. If this is the case then expect more policy debate and volatility to come from emerging markets that are sponsoring slow growth and inflationary pressures.

It will be interesting to see how the weakness in the emerging markets plays out towards sentiment in the US and local markets. We are currently trading at significant areas of support and this may just be a cause for traders to move to the sidelines. As we are mentioned before we would like to see one more major sell-off and break of these support levels should realize such a fall. As for the last three weeks we have been bearish and we suggest that this will continue for the time being.  BHP Billiton's ((BHP)) profit result is not helping talk of a bullish market.