A pullback of easy money in the U.S. could eventually boost Indian stocks. On Thursday, the U.S. central bank will end the second phase of a massive bond-buying program that has flooded global markets with cash since the financial crisis of 2008-2009.
Alex Brandon/Associated Press
The U.S. Federal Reserve has pumped in nearly $1.6 trillion through its ‘quantitative easing’ program to boost its struggling economy. Above, the Federal Reserve building.
The U.S. Federal Reserve has pumped in nearly $1.6 trillion through its “quantitative easing” program in two phases since late 2008, in order to boost its struggling economy. QE 1 ended Mar. 31, 2010, QE2 ends Thursday.
But large global investors used this money, available at super-low interest rates, to buy risky assets like emerging market stocks and commodities which propelled their prices.
So when Quantitative Easing 2, or QE2 as the program is popularly called, ends on Thursday, emerging markets like India could see some outflows thanks to a “flight to safety,” said Ritika Mankar, an economist at Mumbai financial services firm Ambit Capital.
So far this year, foreign investors have generally stayed away from Indian stocks over fears of persistently high inflation and because they feel stocks in India are more expensive than in other countries. Foreign institutional investors have bought just $460 million of Indian stocks in 2011 so far, compared to record inflows of $29 billion in 2010.
But analysts expect that to change. Alex Mathews, head of research at Geojit BNP Paribas Financial Services, said he expects foreign fund inflows to pick up in the next few months especially if commodity prices fall.
A flight from risky assets post-QE2 is likely to deflate commodity prices. India relies on imports for most of its raw materials and high commodity prices have been hurting companies for months.Metal prices have come off multi-year highs in recent months, but copper is still 47% more expensive than a year ago, while aluminum prices have risen 31% over the same period. Despite the recent correction, crude oil price is still up 50% from a year ago.
Any decline in commodity prices will directly help lower India’s inflation, notes Ms. Mankar of Ambit Capital. Also, it would help reduce the country’s budget deficit–another big concern among foreign investors– as it will have to pay less for imports, mainly crude oil.
What should investors do about this? One strategy could be to bet against commodity producers and buy stocks of commodity consumers and interest rate-sensitive stocks such as banking, real estate and auto, says Mohit Mirchandani, head of portfolio management services at Religare Mutual Fund.
Of course, all of this is assuming that the Federal Reserve doesn’t put into place another bond-buying program, or QE3, which some analysts have lately been clamoring for…
Do you think the Federal Reserve should continue its program for providing easy money? Share your thoughts in the Comments section.
Via: India Real Time