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News Analysis


08/09/2015
By mid-2015, Chinese capital market propelled greatly on 30% increased supply of margin money within previous 3 years. However during the same time, Chinese economy started showing a major slowdown. While market valuation was not supported by underlying growth, traders on borrowed money fled the market. Even with artificial trading controls, the market damage sustained. To boost the internal economy, Chinese central bankers decided to devalue its currency and by this time, its market had lost almost 40%! And this began affecting other global markets too. Benjamin Graham in Security Analysis notes that ‘Central banks cannot independently control interest rate, inflation and exchange rate of an economy at the same time without affecting the other’. In that context, what Chinese Yuan devaluation has done? Let us look at some history. My article in July 2011 referred that gross debt as a percentage of GDP by US approached a danger limit of 100% in August 2011 requiring Standard & Poor agency to rank US debt from AAA to AA with a large component of it being externally financed. More than $2 trillion US treasury then was held by China and Japan controlling 15% of US GDP! While China being one of the largest US treasury holders (read controllers) and further being able to control its own currency devaluation in 2015 to internally promote its manufacturing and exports to minimize the decline of GDP could prove to be a double-edged sword globally!!! The significance of interest rate changes is very critical at this juncture. The FOMC meeting by US fed on 16 and 17 September is keenly awaited as far as action on US interest rate goes. What is most revealing at this time in history is that the event such as two largest democracies of the world tinkering on interest rates in opposing directions practically around the same time where US trying to increase and India trying to reduce to boost the economic growth, makes it fragile. We feel this time, any US fed action (or non-action there so) could not only be driven by mere internal US factors but also more determined by sensitive external factors and prominently with further Chinese devaluation could systemically affect all global markets. These could have domino effect depending on which country plays which card and when towards their sovereign interests. In Indian capital market, all major sectoral indices have significantly lost their margin of safety (Nifty 9% below, CNX midcap 7% below and CNX smallcap 12% below their respective reversal levels). This is simply because of high market PE (Sensex PE 19.75) without underlying support of corporate earnings. Even India with good fundamentals, current high valuations need to reset gradually. Usually, such high valuations get normalized with slow and steady reduction in market valuation but what we fear at this time is that it could bring large precipitated movements since they are linked with currency devaluations. Investors need to be cautious and prepared for fast and furious movements of the market which can only be explained by Black Swan. Lately, you must have started seeing articles like ‘worst weekly loss since 2011’ or ‘market touching low in 15 months‘ however what clients of MySmartStocks are used to positively seeing are ‘#3 stock in Media’ or ‘#1 stock in FMCG’ way before they gain such status and they peacefully own such stocks across performing sectors. With them, it is all about long term wealth creation and value unlocking rather than fearing disrupting events. In fact, any disruption in the market will provide a great new opportunity to add more value creating stocks to their portfolios. Uma Shashikant, MD of Centre for Investment Education and Learning rightfully says - ‘Product selection is a serious business and needs expertise’. So, Invest like an Analyst not a rookie – get on with MySmartStocks.com. Mihir Sandesara If you know WARREN BUFFETT, need to know MYSMARTSTOCKS


Source : Bloomberg, IMF, MySmartStocks.com